The outbreak of the novel coronavirus, which causes the disease COVID-19, has had significant impacts on companies and their commercial transactions resulting in disrupted supply chains, delaying supplies to companies and in some cases the performance obligations. As a result, many businesses may be wondering if they can be excused from their contractual obligations due to these events. Oftentimes contracts will provide for relief to a party from liability for non-performance or delayed performance due to events beyond a party’s control, also called a force majeure event.
When determining if a contract’s force majeure clause will be applicable as a result of the COVID-19 pandemic, there are a number of key issues to consider including:
- Whether COVID-19, a pandemic, or similar event is specifically listed as a force majeure event in the contract. However, even if COVID-19 or a similar event is listed, other requirements may need to be satisfied before the force majeure clause is applicable.
- Whether the force majeure clause contains catch-all wording. Phrases such as “other similar events” or “Acts of God” may be applicable, this will depend on the rest of the force majeure clause, the contract, and the circumstances causing the non-performance. It should not be assumed that a catch-all clause will apply to COVID-19 as such clauses are generally enforced narrowly by the courts.
- Whether the clause excludes foreseeable events. The contract may exclude events that could have reasonably been provided against, avoided, or overcome. If so, a force majeure clause that does not specifically list COVID-19 is unlikely to apply to new contracts entered into after COVID-19 became well known, and thus foreseeable.
- Whether causation has to be established. Depending on the contract, it may be required that the impacted party need to show a causal link between COVID-19 and its failure to perform. This will depend on the exact wording of the contract. Generally, an impacted party must show that it is impossible and not just difficult or unprofitable to perform.
- Whether there is any duty to mitigate. The impacted party may be required to show that it took reasonable steps, in good faith and with due diligence to mitigate or avoid the effects of the force majeure on its contractual performance.
- Whether the force majeure clause contains any exclusions. The parties must determine if any exclusions set out in the force majeure clause affect their rights and obligations. Oftentimes, force majeure clauses will not excuse a party’s payment obligations.
- What the notice requirements are. The contract may have notice requirements for the force majeure clause to ensure timeliness, complete content, and proper delivery method identified for any force majeure notice.
- Which state’s law applies. The choice of law and choice of forum provisions in the contract inform how a force majeure clause is interpreted. Industry or trade practice may also be relevant to the clause’s interpretation based on the state.
- What the consequences of a force majeure event are. The results of establishing force majeure will depend on the language of the contract and potentially provide for temporary relief from performance or give rise to a right of termination if it continues for an extended period.
Many contracts include specific events in force majeure clauses, which may apply to COVID-19, these terms include:
- A pandemic or epidemic. COVID-19 was declared a pandemic on March 11, 2020. However, this is only the first step of the analysis. Causation and notice must also be analyzed.
- A public health emergency or communicable disease outbreak. Although this provision will apply, issues such as causation still need to be addressed.
- A quarantine. Even if a quarantine is in place, a contract party may argue that it is not a force majeure event if it affects individuals but not the impacted party as a whole.
- Government or administrative action or changes in laws or regulations. If a state imposed lockdown or forced shut down of businesses has occurred, as it has here in Idaho, force majeure may arguably apply under such provisions.
- Failure of upstream suppliers. If the force majeure clause provides for upstream supplier defaults or delays, there may be an excuse for delayed performance while the party finds another supplier.
As additional states and other government declarations restrict travel, force closures of businesses and cancel events, companies may be more likely to prevail on a force majeure declaration. In addition to force majeure other defenses for non-performance may be available. Depending upon the applicable law, these excuses may have different interpretations, but generally are narrowly interpreted and applied.
- Impossibility. The contractual obligations of a party can be excused if its performance becomes objectively impossible because of a supervening event beyond its control. To successfully use this excuse, performance must be impossible, not just expensive or difficult to implement. Generally, impossibility will apply when a promisor dies or is incapacitated, requires the continued existence of a specific thing and that thing perishes or is unavailable, or when performance is prevented or prohibited by operation of law.
- Impracticability. Performance will be excused when a party can demonstrate that a supervening event has caused performance to be so difficult and expensive that it becomes impracticable, though technically possible. For a supervening event to discharge a duty, the non-occurrence of that event must have been a basic assumption underlying the contract.
- Frustration of Purpose. This is a limited excuse that applies in some jurisdictions when due to a supervening event, the impacted party’s main purpose for entering the transaction is destroyed or removed. The frustrated purpose must be so much the basis of the contract that without the transaction makes little sense.
Many companies carry a variety of insurance policies that may help to mitigate losses related to COVID-19. For further information regarding insurance and what may apply as a result of the current pandemic see our prior blog post
Most commercial entities carry a variety of different insurance policies that may help mitigate their financial losses related to the 2019 novel coronavirus disease.
In Idaho, last week’s Stay-home (Shelter-in-place) Order have forced most businesses to close their doors. Retail, restaurants, hospitality, and many white-color businesses now can only do business remotely or offer limited services.
The chart below can help guide Idaho businesses when deciding if their coverage covers loss profits because of COVD019, and whether to file a COVID-19 related claim.
|COVERAGE TYPE||COVERAGE TRIGGER||COVERAGE HURDLES|
|Business Interruption Insurance (BI)||Provides coverage for lost profits and related costs when a company can’t continue normal business operations. The business interruption must result from “direct physical loss or damage” to the policyholder’s property. Coverage also depends on the extent and impact of the interruption; for example: did the company experience a slowdown or complete stoppage; and was the interruption necessary or a discretionary business decision?||If the company’s property is closed due to fears of COVID-19, but the property itself remains habitable, then the policyholder likely will not meet the direct physical loss requirement. If, however, the property is contaminated (for example, an infected person has been inside), that may meet the direct physical loss requirement. Many BI policies contain exclusions for property damage arising from:virus (likely applies to COVID-19);communicable disease (likely applies to COVID-19); or bacteria (arguably applies to COVID-19).|
|BI Coverage Extension: Civil Authority||Provides coverage for loss of business income when an order of civil or military authority impairs access to the company’s business operations. Requires physical loss or damage to property to trigger coverage. A mandatory quarantine order or an order that a business close to prevent the spread of COVID-19, is likely to qualify as an order of civil authority.||No coverage for losses sustained when a business closes due to mere fear of contagion, but not actual physical contamination.No coverage for prophylactic measures taken before actual property damage occurs (even if the order of civil authority is issued to prevent physical damage from contamination). Other conditions that may exclude coverage include:time limitations; and distance restrictions.|
|BI Coverage Extension: Ingress & Egress||Ingress/Egress extensions cover business interruption losses caused when a company cannot access its own property (other than because of an order of civil authority). Requires physical loss or damage to property to trigger coverage. Actual COVID-19 contamination may trigger coverage (fear of contamination likely does not).||The company’s losses must be casually connected to actual physical loss or damage, which likely includes COVID-19 contamination.Losses sustained when a business cannot be accessed due to mere fear of contagion, but not actual physical contamination, is likely not covered.|
|Contingent Business Interruption Insurance (CBI)||Provides coverage for lost profits and related costs caused by business interruptions at the locations of a company’s suppliers or downstream customers.The business interruption must result from “direct physical loss or damage” to the supply chain partner’s property. Some CBI policies require the insured to identify specific supplier and customer locations to be covered by a policy (locations that are not listed are not covered).||If the supply chain partner’s property is closed due to fears of COVID-19, but the property itself remains habitable, then the policyholder won’t meet the direct physical loss requirement. However, if an infected person has been inside of the property and physically contaminated it, that may qualify as physical loss. CBI policies may contain exclusions for property damage arising from:virus or communicable disease (likely to apply COVID-19); or bacteria (arguably apply to COVID-19).|
|Commercial Property Insurance Extensions (including specific communicable disease coverage)||Some commercial property policies include endorsements or sub-limited coverages that do not require physical damage to the covered property, but do provide coverage for some COVID-19 losses, such as:business interruption losses caused by illness or communicable disease;crisis management costs;cleanup costs; and cancellation of bookings coverage.||These provisions typically have strict coverage requirements; including, for example:actual presence of the communicable disease at the covered property (not the threat of communicable disease); and waiting periods (for example, requiring that access to the property be limited for more than 48 hours)Entertainment, retail, and hospitality entities are most likely to have these coverages.|
This chart provides general information only. Insurance policies may vary widely in scope and coverage and ultimately the specific language of each policy and unique facts of each claim determines if there is coverage.
Insureds should: Carefully review their policies to determine the extent of any COVID-19 coverage; Expect their insurers to review COVID-19 claims with heightened scrutiny.
For further guidance on your policy, please contact Fisher Hudson Shallat and one of our Boise based attorneys will schedule a phone or video conference with you.
Yesterday, in an unprecedented effort to curb COVID-19 (coronavirus) ourbreaks, Idaho Governor Brad Little issued an executive “Stay-home” Order mandating residents to stay put for the next 21 days. The Order requires all residents to stay at home unless they work in an essential industry or venture out to perform an essential activity.
As for businesses, the Order mandates non-essential businesses close their offices:
The order further lays out what is considered essential and non-essesntial. Don Day of boisedev.com has done an excellent job listing what is considered non-essential and essential. https://boisedev.com/news/2020/03/25/whats-essential-and-whats-not-what-we-know .
However ambiguity exists over certain provisions. To help guide your business, here is Fisher Hudson Shallat’s legal interpretation of the top 3 most confusing provisions:
- Real Estate professionals are exempt when transferring property.
The order considers the purchase and sale of property to be operation of Essential Infrastructure:
Essential Infrastructure includes “construction of housing…. and the transfer and selling thereof..”
We interpret this provision to mean those professionals within the real estate industry may continue to perform services necessary to complete a transaction. This includes all professionals who perform work once a property is under contract, such as: appraisers, home inspectors, and title/escrow officers. Some of these jobs can be done remotely (title officer), some can’t (inspection, appraiser).
Therefore, if you are performing a necessary component to complete a real estate transaction which requires you to physically visit the property, you are working in an essential industry. This means you may go out to perform that portion of the job which requires a physical inspection of the property.
However, this exemption does not extend to properties not under contract. If you are a realtor and you do not have any properties under contract, stay home. Also, if you are a lender or title officer and you can do your job remotely, stay home.
2. Most legal and accounting professionals must stay home.
The order exempts legal and accounting professionals, but only under limited circumstances:
Attorneys, accountants and their staff may only continue physical operation of an office “when necessary to assist in compliance with legally mandated activities.” This means that attorneys with court hearings must still appear in Court, if they are complying with a court order.
However, given that Idaho courts have continued most in person hearings, except for emergency circumstances, its highly unlikely an attorney will meet this exception. The vast majority of civil attorneys are not-exempt under this order, and their staff are equally non exempt. If you’re an attorney, unless you have an emergency court hearing, you and your staff must stay home.
The same goes for accountants. Given that the filing deadline for taxes has been extended, accountants should close their doors for now.
3. A general exception for all businesses.
Despite this Order, business owners and their staff can still venture outside if they are performing a Minimum Basic Operation. This has been defined as:
Thus, business owners and their employees can still pick up and deposit checks or count inventory. However, this is a very narrow exception and those conducting a Minimum Basic Operation must still maintain social distancing requirements.
1. Employee Health comes first.
A law firm’s treatment of their employees speaks volumes to their core values. White collar employees all over the country are paying extra close attention to how the management treats them. With the COVID-19 news inescapable, employees are hypersensitive to their response. Law firms should show their employees that their health and safety come before anything else. Employee anxiety and fear are real and ignoring it will foster bad will.
2. Client health comes a close second.
When you welcome your clients into your office, they presume they are in a safe environment. However, when you interact with your clients face-to-face, you cannot guarantee you are not putting them at risk for exposure to COVID-19. Many law firms have elderly clients who are at risk of death if they contract COVD-19. Given the nature of this virus, you may already be infected but not know it. Thus, you could transmit COVID-19 to your clients without knowing it. Moreover, having your clients come into your office requires them to leave their homes, further exposing them.
3. Community health comes third.
Having an open office means you are inviting the community into your space. This includes deliveries, cleaners, etc. It’s impossible to responsibly practice social distancing with an open office. The people who interact with you, your staff, and your clients, could either be carrying the virus or could contract if from your office.
4. It’s impossible to know the extent of a COVID-19 outbreak in your community.
Given the transmitability of COVID-19 and the lack of testing available, its unfortunately impossible to know how prevalent it is at this stage. Medical professionals now agree that asymptomatic transmission of the coronavirus has fueled outbreaks. For example, it appears that a Massachusetts coronavirus cluster with at least 82 cases was started by people who were not yet showing symptoms, and more than half a dozen studies have shown that people without symptoms are causing substantial amounts of infection. Due to these factors, closing your office is the only 100% safe decision.
5. An outbreak at your office is a business killer.
Lastly, businesses should close their physical office given the risk law firms run by remaining open. Imagine if reaction your law firm would receive if a client contracted COVID-19, and suspects it came from you or your staff. At the very least, this rumor would hurt your law firm’s reputation.
Now is our moment to be leaders in the white-color workforce. Instead of being the last industry to implement remote options for employees and clients, let’s lead the charge and set a responsible example.
The Do’s and Dont’s of Coronavirus – Helping to keep your employees and business healthy in a time of uncertainty.
March 19, 2020 UPDATE: Governor Brad Little adopted White House guidelines yesterday and recommended all Idahoans work from home if possible (Source: https://www.idahoednews.org/news/little-urges-idahoans-to-avoid-groups-of-10-or-more-and-to-work-from-home/). Governor Little also recommended Idahoans avoid groups larger than 10 people, and avoid unnecessary travel.
These recommendations are in line with our best practices for employers.
March 18, 2020 UPDATE: We continue to recommend Idaho employers allow employees to work from home. The CDC, the Trump Administration, and the US Surgeon General all recommend Americans stay at home as much as possible over the next 15 days.
Surgeon General Jerome Adams stated yesterday: “My message is to everyone: Fifteen days, you can do anything for 15 days. Stay at home as much as possible, limit the spread, we do not want to look like Italy does two weeks from now.” (Source: https://www.cbsnews.com/news/coronavirus-surgeon-general-jerome-adams-interview-follow-cdc-guidelines/)
Given these recommendations, Fisher Hudson Shallat advises local Idaho companies and other employers continue allowing employees to work from home.
MARCH 17, 2020 UPDATE: The latest guidance on dealing with the COVID-19 pandemic is that working from home is encouraged whenever possible.
If you are in a critical infrastructure industry, like healthcare and pharmacy services, as well as food supply, you are encouraged to maintain your normal work schedule. Employers should, at a minimum, follow CDC guidance to protect your employees’ health at work. Additionally, based upon the most updated epidemiological studies, best practices for employers in Idaho now include allowing non-essential employees to work remotely.
As of March 17, 2020, Idaho has confirmed 7 cases of COVID-10, with investigation regarding transmission under investigation for a couple of the cases. However, numerous local governments, businesses, and entities are taking precautionary measures including sending employees home, closing schools, closing businesses, and reducing hours.
Critically, the number of tests conducted in Idaho so far has only been 295 out of our 1.75 Million residents. This equates to only 13 tests per 100,000 residents. Comparatively, South Korea, where the epidemic is now receding, has administered 369 tests per 100,000 residents.
Coronavirus tests per 1 million people:
South Korea: 5,000 +
Guangdong, China: 2,820
Italy: 2,000 +
UK: 500 +
United States: 125
(As of March 17, 2020. Source: https://www.nytimes.com/interactive/2020/03/17/us/coronavirus-testing-data.html)
Medical professionals now agree that asymptomatic transmission of the coronavirus has fueled outbreaks. (Source: https://www.cnn.com/2020/03/14/health/coronavirus-asymptomatic-spread/index.html). For example, it appears that a Massachusetts coronavirus cluster with at least 82 cases was started by people who were not yet showing symptoms, and more than half a dozen studies have shown that people without symptoms are causing substantial amounts of infection.
With these considerations in mind, we now believe the best practices for employers in Idaho to include allowing non-essential employees to work from home.
- What Employers Should Do Now, When There Are No Known Cases:
As of March 17, 2020, employers should encourage all non-essential employees to work from home. For companies that do not currently have employees that are known to be infected, the Center for Disease Control suggests taking the following actions:
- Actively encourage sick employees to stay home (even without a doctor’s note), employees exhibiting a fever should not come to work until at least 24 hours after the fever and other symptoms have subsided.
- Communicate with contractors or temporary employees about the importance of employees staying home when sick
- If employees do show up to work sick and appear to have acute respiratory illness symptoms, keep them separate from other employees, send them home, and encourage them to contact their doctor or primary care physician.
- Perform routine environmental cleaning and provide disposable cleaning wipes that can be used to wipe down common surfaces.
- Advise employees that have recently traveled to check themselves for symptoms of acute respiratory illness upon return and remain at home if exhibiting any symptoms.
- Work with employees facing travel restrictions and visa renewal issues.
Additionally, it is advised that now, while no known cases are present in their workplace, employers create an infectious disease outbreak plan for how they will respond if one of their employees becomes ill with COVID-19. Considerations for the plan should include 1) reducing transmission between employees; 2) protecting those individuals at higher risk for adverse health complications; 3) maintaining business operations; and 4) minimizing adverse effects on other entities in the supply chain. This plan should include:
- Appointing a single individual or department in charge that employees can speak to regarding their questions or concerns to ensure a coordinated and consistent response to all inquiries.
- Educating supervisors on the company’s planned response policies.
- Developing flexible sick leave policies that are consistent with public heath guidance and permit employees to stay home while sick or while taking care of a sick family member and ensure that employees are aware of such policies.
- Reviewing or establishing flexible working arrangement and accommodation policies. This may include permitting remote or flexible working or implementing staggered shifts, which help to provide additional distance between both employees and others, depending on the needs of your business.
- Communicating with those employees whose position does not permit remote or flexible work whether time in which they are required to be quarantined will be paid and if so, whether it will be through the use of their vacation, sick or other available leave, or if it will be outside of the company’s typical leave policies. For union-represented workers compliance with applicable collective bargaining agreements should be examined.
- Ensuring that any IT needs to support a remote work force are available to employees, including maintaining data security, especially for entities covered by the Health Insurance Portability and Accountability Act (“HIPAA”).
- Identifying potential workplace exposure and health risks to employees as well as triggers and procedures for activating the company’s infections disease outbreak response plan. This includes reviewing relevant Occupational Safety and Health Administration (“OSHA”) materials on how to protect workers from potential exposures.
- Identifying essential business functions, including the jobs or roles
- Establishing a process to communicate to employees and business partners on the company’s infectious disease outbreak plan and how to quell employee fear, anxiety, rumors and misinformation.
2. What Employers Should Do When an Employee is Confirmed to have the Coronavirus:
Once a case has been identified within your company, the company’s infectious disease outbreak response plan should be triggered and activated. Actions that need to be taken by the employer include:
- Informing fellow employees of possible exposure to COVID-19. However, employers should be mindful about maintaining the confidentiality of the employee’s health information pursuant to the Americans with Disabilities Act. Depending on the nature of the workforce, the employer may need to balance the affected employee’s privacy interests with the need to adequately inform the workforce.
- Encouraging compliance with the CDC’s Interim Guidance for any employees who have had close contact with a person confirmed to have COVID-19 infection, including missing work for a potential 14 day incubation period.
- Coordinating with state and local health departments as appropriate.
3. What Employers Should Not Do:
If an employee does become sick, actions that should be avoided by employers include:
- Fearmongering and panic should be avoided at all costs.
- Forced isolation, until a confirmed medically informed decision has been made, should be discouraged.
- Making decisions or implementing procedures based on ethnicity or national origin.
4. Legal Considerations
In addition to planning for the interruption of business and absence of employees in light of a local Coronavirus outbreak, there are also additional legal considerations that employers should address while creating a response plan.
A. Discrimination Issues
Potential discrimination issues may arise if COVID-19 related responses and restrictions target individuals based on fear instead of facts. To avoid claims of national origin discrimination, there should for example, not be additional quarantine requirements on individuals from China or of Southeast Asian heritage. All actions taken by the employer should be based on objective, legitimate, non-discriminatory business reasons. If an incubation period leave policy is created, it should be based on neutral, objective information consistent with information received from the CDC, WHO, or your local public health officials.
B. Leave and Sick Pay Issues
If an employee is quarantined due to their own travel or exposure or to care for a family member, employers should determine whether the Family and Medical Leave Act (FMLA) or other leave laws apply to the employee’s absence. However, if it is the employer’s implemented plan or policy that requires an individual to stay away from work, the employer should be cautious before designating any time away as leave under a specific leave law. Additionally, some state laws prohibit employers from mandating the use of paid sick time and paid time off, rather the employee must be permitted to choose whether to use the benefit while absent from work. Employers should also ensure that they are implementing consistent protocols for employee re-entry to the workplace in terms of obtaining a release clearing the employee to return to work and ensuring the employee does not pose a risk to the health and safety of themselves and others.
C. Furloughs and Layoffs
Short-term layoffs or furloughs are
generally permitted so long as selections are not based on protected categories
like race, gender, or national origin. For salaried employees, care should be
taken to avoid reducing the weekly salary of exempt employees who typically
should continue to receive their full salary for each workweek where work was
performed (including work at home, like checking emails). Hourly workers are
not required to be paid for time not worked.
If considering short-term layoff or furlough of less than six months, it
should not implicate notice requirements under the Federal Worker Adjustment
and Retraining Notification (WARN) Act, but in some states may require advance
notice under state statutes. Further, employees may have rights to compensation
under state law or employee benefit programs.
 Cdc.gov/coronavirus/2019-ncov/cases-in-us.html (accessed March 10, 2020).
 CDC Interim Guidance for Businesses and Employers, https://www.cdc.gov/coronavirus/2019-ncov/community/guidance-business-response.html?CDC_AA_refVal=https%3A%2F%2Fwww.cdc.gov%2Fcoronavirus%2F2019-ncov%2Fspecific-groups%2Fguidance-business-response.html, (accessed March 10, 2020).
The Idaho Business Review has named Anthony Shallat a 2019 Leader in the Law award recipient. Anthony was named a 2019 “Up and Coming Attorney” in Idaho. The following is a profile on Anthony published by the Idaho Business Review:
Anthony Shallat started his career in politics, but soon moved to civil rights and white collar fraud litigation with Angstman Johnson before joining Fisher Hudson in downtown Boise in 2019.
Today, he is focused on being a local entrepreneur and on advocating for his clients. By all measures, he’s thriving on both fronts.
Shallat first made his mark on Boise with a lawsuit against Corrections Corporation of America (CCA), which has since rebranded itself as CoreCivic. He represented inmates who had been injured in a brutal gang stabbing at the company’s private prison.
During discovery, he explains, he found significant corporate and white collar fraud. At trial, a jury found that his clients’ rights had indeed been violated.
At Fisher Hudson, Shallat is growing his stable of clients while building up the firm’s brand through marketing efforts, which he volunteered to deploy himself.
He has represented a beer distributor, a publicly traded company, local real estate investors, homeowners involved in real estate disputes and even an e-scooter company.
Shallat, who is known for his propensity to dive deeply into new topics on a regular basis, has also become an expert in technology law. Last year, he organized the Idaho Bar’s first-ever continuing education course focused on cryptocurrency law. He also represents local cryptocurrencies and regularly writes about new developments in the field on his firm’s blog.
He’s fairly new to Fisher Hudson, but Shallat has already found friends and earned respect among his colleagues.
“I think he’ll be one of the long-term leaders there, and we all are really grateful that he joined our firm,” says Clare Thibeau, who worked with him when he first joined and has since become the founder of Impresaria, a business consulting firm.
“He has an energy about him that I really enjoy — it’s fun to be around him,” Thibeau says. “It feels like he’s taking care of business in a great way.”
Off the clock, Shallat focuses on historic and environmental preservation. He is the founder of Keep Idaho Public, which uses proceeds from apparel sales to benefit public lands. He also serves on the Boise Historic Preservation Commission, where he has worked to save a number of historic homes in the East Main Historic District from demolition.
He calls his work with technology, on one hand, and with preservation, on the other, an interesting juxtaposition. But it’s one he hopes will serve Boise well now and into the future.
“I see some potential challenges with all the population growth coming in here and I feel like I have the opportunity to bridge the divide between historic, old Boise and 2020 Boise, and helping our communities co-exist,” he says.
If you’re like most millennials, estate planning is not high on your list of priorities. Paying off student loans, buying a first home and starting a family are more common concerns of those in their 20s and 30s. However, it is during this time in our lives that we begin to establish financial stability, acquire legitimate assets of our own and become responsible for people other than ourselves. Although no one likes to think about things like death and disability, planning for these events ahead of time will protect the people you love and reduce the burden on them during a difficult time.
Generally speaking, estate planning is the process of organizing your affairs so that in the event you are unable to care for yourself, or you have passed away, your finances are in order and arrangements are made to care for your loved ones. There are a variety of tools available to achieve these goals, but one of the most fundamental and useful for millennials is a testamentary will. A will is a legal document that sets forth your wishes regarding the distribution of your property and care of any minor children.
In the event that you die without a will (or other similar instrument), the disposition of your property will be determined by the court. This means that your assets may potentially end up in the hands of someone other than who you intend. These days, many millennials are involved in committed romantic relationships, but put off marriage or avoid it all together. While marriage creates default rules that give spouses a legal entitlement to your property, unmarried partners have no such right and will be left with nothing in the event of your death. In Idaho, even if you are married your estate may be split between your spouse, parents or your children in ways that you may not have foreseen. The creation of a will allows you to spell out how you want to divvy up your property and assets in the manner of your choosing.
For millennials that have children, a will allows you to designate a personal guardian who will care for your children when you are gone. If this issue has not been addressed before you die, the court could make the decision and the resulting guardian may not be who you would have intended if the choice was yours. Frequently, parents opt to include a trust to be administered along with their wills naming their children as the beneficiaries. The creation of such a trust allows you to provide further instruction on how to tend to your children’s financial needs as they grow.
Millennials are the first generation to grow up online. As a result, many have amassed a number of digital assets. Some digital assets such as cryptocurrencies, online financial accounts and airline points have significant worth. Other digital assets, such as social media accounts, photos and videos have sentimental value and should be preserved or appropriately shut down. Do you want revenue generating assets be transferred to people who can continue to manage them or should cash values be redeemed? Should social media webpages be deleted or updated memorial page? A properly drafted will should include instructions in accordance with your wishes along with a separate list of account names, passwords.
As the old saying goes, in this world nothing is certain, except death and taxes. With that in mind, a simple estate plan can ease the burden of both, regardless of how much stuff you have or how old you are. While it may sound like an exhausting process, in truth, you don’t need much to start planning.
Let’s talk about the Fair Labor Standards Act (FLSA), and how simple oversights can cause you major legal headaches. As a background, the FLSA was passed by Congress in 1938 to protect “all covered employees from substandard wages and oppressive working hours.” Barrentine v. Arkansas Best Freight Sys., Inc., 450 U.S. 728, 789 (1981); see also 29 U.S.C. § 202(a) (stating that the FLSA protects “the minimum standard of living necessary for the health, efficiency and general well-being of workers.”). The FLSA requires that an employer pay overtime compensation to employees who work more than forty in a work week. 29 U.S.C. § 207(a)(1). The FLSA provides an exemption from the overtime requirement to “persons employed in a bona fide executive, administrative, or professional” capacity. 29 U.S.C. § 213(a)(1).
In order to classify an employee as exempt under the FLSA, the employer must be able to prove that (1) the employee performs executive, administrative, or professional duties; (2) the employee is paid at least the minimum salary level; and (3) the employee is paid on a salary basis. Employers can find a substantial amount of guidance freely available on other legal publications and blogs regarding what duties satisfies the first requirement, and the minimum salary level required to satisfy the second requirement. However, very little guidance exists discussing the salary basis test.
The Department of Labor’s regulation, 29 C.F.R. § 541.602, governs the application of the salary basis test for exempt employees (i.e. salaried employees) under the FLSA. Under § 541.602, an employee is paid on a salary basis when: “(1) ‘the employee regularly receives each pay period on a weekly, or less frequent basis, (2) ‘a predetermined amount constituting all or part of the employee’s compensation,’ and (3) the amount ‘is not subject to reduction because of variations in the quality or quantity of the work performed.’” 29 C.F.R. § 541.602(a). To qualify under the salary basis test, “an exempt employee must receive the full salary for any week in which the employee performs any work without regard to the number of days or hours worked . . .” Id.
There are seven exceptions to the general rule, which are set forth in are listed in 29 C.F.R. § 541.602(b) (1) – (7). One such exception provides that:
Deductions from pay may be made when an exempt employee is absent from work for one or more full days for personal reasons, other than sickness or disability. . . However, if an exempt employee is absent for one and half days for personal reasons, the employer can deduct only for the one full-day absence.
What does this mean? You cannot deduct salaried employee’s salaries for showing up late. For example if you deduct a salaried employee’s paycheck for being tardy because his or her yoga class ran late, you’re violating the FLSA.
Another exception provides, in part:
Deductions from pay can be made for absences of one or more days occasioned by sickness or disability . . . if the deduction is made in accordance with a bona fide plan, policy or practice of providing compensation for loss of salary caused by such sickness or disability. The employer is not required to pay for any portion of the employee’s salary for-full day absences for which the employee receives compensation under the plan, policy or practice. Deductions for such full-day absences also may be made before the employee has qualified under the plan, policy or practice, and after the employee has exhausted the leave allowance thereunder.
What does this mean? If you deduct from your salaried employee’s paycheck because he or she is sick, unless you have a PTO or sick leave policy and the employee has already exhausted the leave provided, you are violating the FLSA.
These two exceptions are easy enough, right? Not so fast. Employers had best make sure their deductions are “proportionate” to the time the salaried employee missed, otherwise you have misclassified your otherwise salaried employee as an exempt/salaried employee, and you now owe the formerly salaried employee for all of the overtime he or she worked over at least the last two years. And if you make that mistake with one salaried employee, chances are that your payroll department make it with all of your salaried employees. 29 C.F.R. § 541. 602(c) provides, in relevant part:
(c) When calculating the amount of a deduction for pay allowed under paragraph (b) of this section, the employer may use the hourly or daily equivalent of the employee’s full weekly salary or any other amount proportional to the time actually missed by the employee. Id. (emphasis added).
So, how can your payroll practices cause you legal headaches exceeding your worst nightmares? In many ways, but one easy way is to use a semi or bi-monthly pay period and then calculate your employees’ deductions based on a percentage of time missed relative to the amount of working hours (or days) in any given pay period. While that might seem like a logical way to allocate deductions, and some employers certainly do it, you have created a system that will give you disproportionate deductions for your employee’s missed workdays. The reason being is that in semi or bi-monthly pay periods, you have some pay periods that have 72 hours (9 workdays), some with 80 hours (10 workdays), some with 88 hours (11 workdays), and the occasional 96 hours (12 workdays) that employees are expected to be at work.
Let’s assume you pay your salaried employee $2,0000 each pay period, and for the purposes of making deductions, you attribute an effective hourly wage of $25 per hour (80 hours X $25 per hour = $2,000 salary). If you calculate a deduction for an employee who missed 8 hours (1 workday) during an 80 hour (10 workdays) pay period by subtracting the 8 hours (time missed) from the 80 hours you expected that employee to work during that pay period, and then multiply the amount of hours worked (e.g. 72 hours) by the employee’s effective hourly rate ($25 per hour), you will be deducting $200, or 10% of the employees paycheck during that pay period. That deduction is perfectly proportionate and does not violated the FLSA’s Salary Basis test because the employee missed 10% of the hours/workdays during that pay period.
The calculation for the deduction of an employee who missed a single day in an 80 hour pay period (10 workdays) will look like this: 80 (hours in pay period) – 8 (hours missed) = 72 (hours actually worked); 72 (hours actually worked) X $25 (per hour) = $1,800 (salary). This is a $200 reduction from the $2,000 semi-monthly salary, which is directly proportionate to the time missed.
If, however, your employee misses a single day of work during a 72 hour pay period (9 workdays), your calculation for the deduction will look like this: 72 (hours in pay period) – 8 (hours missed) = 64 (hours actually worked); 64 (hours actually worked) X $25 (per hour) = $1,600 (salary). This is twice as much as the deduction from the 80 hour pay period, and is unquestionably disproportionate to the time the employee missed.
That is a relatively cut and dried example of a Salary Basis violation. How much will that cost you? First you will be required to pay your employees all of their overtime for at least the past two years. Then double that for the FLSA’s near mandatory liquidated damages, which can only be avoided if the employer shows “good faith” or “reasonable grounds” for the employer’s belief that they were not violating the FLSA—which is much more difficult to prove than employers typically believe. Then add in all of the Plaintiff’s attorney’s fees—who probably won’t be anywhere as efficient as your attorney—under the FLSA’s attorney’s fees requirement, which is one of the strictest and most certain fees shifting provision under federal law. Don’t forget about your attorneys’ fees. In short, you will be paying a ridiculous amount of money.
One way to calculate proportionate deductions would to be to calculate an equal amount for every day in a fixed period of time—like one week, two weeks, or even a full year. For example, an employee makes $2,000 per semi-monthly pay period makes $48,000 per year (24 pay periods X $2,000). Since there are 52 weeks per year, you divide $48,000 by 52 and you get a weekly salary equivalent of $923.08 per week. Assuming a general workday is from 9 to 5 on Mondays through Fridays, divide the weekly salary equivalent of $923.08 by 40 hours in a general workweek to get an effective hourly rate of $23.08 (you can skip this multipart calculation by dividing the annual salary by 2080, which is 40 hours a week multiplied by 52 weeks a year). If an employee misses a day of work, and the FLSA permits you to make a deduction, multiplying the effective hourly rate of $23.08 by 8 hours for the day missed, and you have a proportionate deduction of $184.64. The Courts will not scrutinize minor variations in the amount deducted if it is comparable to the rate the employee is paid for the time he or she actually worked.
With the FLSA, the old adage “an ounce of prevention is worth a pound of cure” might be an understatement. In retrospect, spending a couple of thousand dollars to make sure you have all of your FLSA ducks in a row can save you from, at best, an extreme legal headache down the road.
In the past few months, federal courts have shown more of their cards on how they will apply The Howey Test when determining what cryptocurrencies will be considered securities.
Civil suits have worked their way through federal courts to an extent where a few decisions now serve as guidance on when a cryptocurrency may qualify as a security under federal law.
To determine if a cryptocurrency meets the legal definition of a security, federal and state courts use a well established legal analysis known as The Howey Test.
The U.S. Supreme Court adopted the Howey Test in 1946 in order to provide a uniform analysis for lower courts and litigants to apply when determining if an investment qualified as a security.
A recent federal court decision has given coin proprietors and regulators a framework in understanding how some federal judges may apply The Howey Test to cryptocurrencies.
In Balestra v. ATBCOIN LLC, a federal court in the Southern District of New York held that the cryptocurrency ATB Coin could be considered a security because its investors expected a profit from their investment and relied upon the coins promoters for guidance.
The Balestra Court held that ATB Coin met the second element of the Howey Test, common enterprise, could be met because Plaintiffs had plausibly alleged that “potential profits stemming from the future valuation of the ATB Coins were entirely reliant on the success of Defendants’ new blockchain.”
“Defendants encouraged investors to purchase ATB Coins based on the claim that the speed and efficiency of the ATB Blockchain would result in an increase in the coins’ value.” Balestra v. ATBCOIN LLC, 380 F. Supp. 3d 340, 354 (S.D.N.Y. 2019).
The Balestra Court also held that ATB Coin met third prong of The Howey Test, the expectation of profits, was met because “purchasers of ATB Coins reasonably believed that those coins would increase in value based primarily on Defendants’ entrepreneurial and managerial efforts.” Id.
Critically, however, the Court found that ATB coin did not operate on a decentralized system, such as Ethereum or Bitcoin, but instead resembled a more centralized investment fund.
Although this decision should put coin proprietors on notice that they may be exposed to civil suits from investors, the SEC has also consistently hinted that it does not consider decentralized cryptocurrencies to be securities.
The SEC has taken the position that a very important distinction between “a replacement currency” and “tokens”. As SEC Chairman Jay Clayton stated last year:
” … there are different types of crypto assets. Let me try and divide them into two areas. A pure medium of exchange, the one that’s most often cited, is Bitcoin. As a replacement for currency, that has been determined by most people to not be a security.
Then there are tokens, which are used to finance projects. I’ve been on the record saying there are very few, there’s none that I’ve seen, tokens that aren’t securities. To the extent something is a security, we should regulate it as a security, and our securities regulations are disclosure-based, and people should follow those and provide the information that we require. “
The SEC has recently released an extensive guidance on the difference between mediums of exchange and tokens entitled “Framework of ‘Investment Contract’ Analysis of Digital Assets” (available here: https://www.sec.gov/files/dlt-framework.pdf).
In thiswhitepaper, the SEC takes the position that the first two elements of the Howey Test, Investment of Money and Common Enterprise, “typically exists” in digital assets.
In its analysis of the third element, Reasonable Expectation of Profits Derived from Efforts of Others, the SEC focuses its inquiry on active participation or promotion by a cryptocurrency proprietor.
“When a promoter, sponsor, or other third party (or affiliated group of third parties) (each, an “Active Participant” or “AP”) provides essential managerial efforts that affect the success of the enterprise, and investors reasonably expect to derive profit from those efforts, then this prong of the test is met.”
Conversely though, the SEC also heavily relies upon the nature of the cryptocurrency to determine whether the Howey Test is met. If a fully operational decentralized network exists, the SEC states “the less likely the Howey test is met.”
Taken as a whole, these recent developments should lead cryptocurrency promoters to conclude that they may be subject to securities suits from investors if they indicate their coin may be used as an investment vehicle. However, cryptocurrency promoters should also note that the SEC will be less likely to regulate their coin as a security if it operates off of a distributed ledger.