Chapter 93A Demand Letters: Flammable Materials for Any Business

Chapter 93A Demand Letters: Flammable Materials for Any Business

Receipt of a G.L. ch. 93A demand letter by any business is a serious legal issue. It is a pre-text for costly State Court litigation and sets a path for litigants to use the law to impose severe financial penalties on businesses that have violated the statute. This Article will examine the severity of the statute and why it is a good idea to take these letters very seriously. These demand letters should be treated as flammable.  With due care, expeditiously and from a distance.  

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Important Clauses in Employment and Independent Contractor Agreements

Many Massachusetts employers and business owners are now turning to at-will employment contracts and independent contractor agreements to protect their interests and govern its relationship with employees and contractors. These types of employment agreements are commonplace in most management and professional job positions, as well as for skilled outside, independent contractors.  In all likelihood, if a business provides a lucrative job position to an employee, an employment agreement may become a condition prior to commencement of employment. 

What are the types of clauses that businesses, employees, and contractors can expect to see in a well-drafted employment agreement? 

Term of Service or At Will or Terminable Status - Typically, most employment agreements or independent contractor agreements are "at will." In other words, you are not provided to any continuing right to employment or payment for a certain term. In most cases, a business can terminate its relationship with employees according to the terms of the contract; the company's own policies; and within the bounds of Federal and State laws. So long, as businesses are compliant with these covenants, policies and laws, then the business can terminate employment for any reason. Some employment or independent contractor agreements do contain a set term of service.  If you are drafting an agreement or signing one, and you contemplated a term of service, make sure that this is clearly reflected in the document. 

Confidentiality - Most businesses and employers will take measures to put their employees and contractors on notice that its considers its data, systems, processes, lists, diagrams, and other information as confidential.  The Employer will restrict the employee or contractor's use of that information by setting terms on how such information may be used, and set limitations on that person's authority to use that information.  These clauses typically contain a continuing duty in perpetuity for an employee or contractor to maintain the confidentiality of information. 

Non-Compete / Non-Competition - Most businesses and employers will restrict an employee or contractors' ability to work or sell information to its competition or set up a competing enterprise.  Any non-compete must be reasonable.  It cannot impose draconian conditions that eliminate a person's ability to work for a different employer. Non-compete agreements are reviewed on a case by case basis, and a well-drafted and reasonable agreement will be enforced by a Court. In other words, the business or former employer may obtain an injunction that legally prohibits you from working for a competitor.  Most, if not all, employers now ask whether you are subject to a non-compete agreement prior to commencement of work.  The reason is that a potential employer can also incur liability by hiring an individual who is subject to this type of restriction.  

If you are a business that desires to set out the terms of your engagement with employees or contractors, or have questions about an agreement, please contact the Law Office of Stefan Cencarik, PLLC at 617-669-9780. We represent clients in the Boston and North Shore areas, including Boston, Cambridge, Lynnfield, Woburn, Burlington, Andover, Saugus, Peabody, and the surrounding towns and communities.  

 

Informal Partnerships Can Lead to Litigation

Partnerships are difficult endeavors for the majority of business owners and investors.  Informal (or handshake or gentlemans' / ladies' agreements) are sometimes ordinary practice when two or more individuals decide to enter into a joint business venture. When going into business with a relative, long time friend, or work colleague, it may appear to be a good idea to rely on these types of informal agreements, however, when problems arise for the business or the individuals partners individually, that close relationship may be relegated to irrelevance. 

Most, if not all, Massachusetts legal practitioners would recommend against informal partnerships, and instruct their client to form a Limited Liability Company (LLC). Unless a formal entity is registered in Massachusetts and unless the partners decide to conduct business under the LLC, both partners will be personally liable for the debts and liabilities of the partnership. In other words, if the partners incur debt or face the prospect of a legal claim, each partner will put at risk their own personal assets and income.  Also, what happens if one partner commits an unlawful act or injuries another party in commerce, and is subject to litigation? Without any form of limited liability, the other partners will also be liable for those actions. 

Additionally, what happens when the partners decide to part ways, and when there is a dispute over ownership, buyout, rights to intellectual property, or continuing use of customer lists, or other goodwill? What happens if the partners are unclear about the management and/or daily duties, time commitment, financial investment requirements, or transfer of ownership?

Without some type of legal entity structure or written partnerships agreement, informal business partnerships may expose partners to unnecessary (and costly) liabilities and litigation. If you are considering forming a new business partnership in the Boston and North Shore areas of Massachusetts, please contact the Law Office of Stefan Cencarik, PLLC at 617-669-9780 for a consultation.  

Be Careful When Selecting Your New Company Name

Starting a new business venture is not easy.  Selection of entity, agreements with founders, fundraising and investments, finding office space, purchasing equipment, materials, and supplies,  creating a new web-site, and attracting customers or other relationships is difficult work.  Entrepreneurs and new business owners sometimes find the most onerous task in selecting a new organization name.  While it is important to select a business name that not only relates and identifies your business, most marketing experts would recommend that you select a name that you can build a brand around.  Eventually, as your business grows, you will build a reputation, loyal customer base, as well as a name and logo that uniquely identifies your business.  These intangible assets, or "goodwill," become valuable when you consider a sale or buyout of your business or interests. 

In addition to the creative and artistic challenges of selecting an entity name, what types of legal issues can arise during entity name selection?

First, and foremost, it may be that an entity with the same name already legal exists in Massachusetts.  If the name of your organization, and the organizational type (LLC, Inc., Corp., etc.) has already been selected by another organization, and it remains an active, valid entity, you will not be able to use that name. The Secretary of State for the Commonwealth of Massachusetts will not permit entities operated and owned by different parties to use the same legal organization name. (You can use the same trade name as another organization so long as your organization type is different. Example: You are an LLC, and the other entity is a Corporation). In this instance, your name selection may be limited by another organization's prior use and registration of that name.  

Second, your ability to obtain a domain name, for the purposes of identifying your Internet resources (computers, web-site, email server, etc.), may also be limited.  In all likelihood, unless you have selected a unique or obscure name, the domain name and extension will not be available for the original top level domains, including .com; .org; and .net.  You may have to select a name and extension at a generic top level domain, such as .attorney or .financial.  Or you will have to use a variant of your actual entity name, or adopt a trade name (D/B/A). 

Finally, and most importantly, selecting the "wrong" trade name can expose your business to a trade mark or service mark infringement cease and desist letter, or infringement action. There are both state common law trade mark laws across the United States, including Massachusetts, as well as Federal trade mark laws, The Lanham Act.  These laws and acts make it unlawful for a business that provides similar products or services to use the same or similar name and/or logo of another business that has already secured rights to that name and/or logo.  In other words,  you cannot profit from the exact use or variation of another entity's name and/or logo.  The test for Federal trade mark infringement is whether your use of the trade mark of another can cause confusion to potential customers. If you are opening a fast food hamburger restaurant, you could not use the name "McDowell's" and use a yellow "M" in an Arial font to identify your business without infringing upon one of the most recognizable service marks world-wide. 

As described above, selection of a new organization name is not an easy task, and there are some potential intellectual property legal issues that should be evaluated by a qualified business lawyer.  If your business needs business startup or business formation services, please contact Attorney Stefan Cencarik at 617-669-9780. 

 

Closely Held Corporation Can Cause Legal Issues and Headaches

Closely held Massachusetts corporations (or often referred to as closely held business) are typically entities that are controlled and owned by a small, limited number of persons.  Closely held corporations are often associated with a family business (a/k/a family owned business) and the concept has expanded to include small groups of partners who were at one point friends, colleagues, or co-workers. A typical closely held business is controlled by a select group of persons who play a significant role on the board of directors and as key manager of the company. The affairs of a closely held business are private, and ownership interests are not publicly traded.

The downside of closely held businesses is that they very frequently entail disputes among the owners. One recent example of the severe issues that a closely held business can face is the recent dispute in 2014 involving Market Basket.  This popular supermarket chain operates approximately 75 stores in New England, and was primarily owned by two cousins. An internal dispute arose among the primary shareholders and key board of director members that led to a very public dispute regarding control and ownership of the entity.

This is one example of where disputes can arise when shareholders disagree on the control, discretion and decisions of the board members and officers. Shareholders can also be dissatisfied with the amount of profits earned by the company, as well as question the decisions of the Board and officer that caused the company’s poor financial performance.  Or in other situations, if a company is being sold or liquidated, the shareholders may have concerns about the valuation of the company and how shareholders will be treated.  And finally, significant issues can arise when an owner wants to exit the business and decides to sell his or her stock.

The Law Office of Stefan Cencarik, PLLC handles various business litigation and disputes, and provides related consulting services, mostly involving closely held businesses. Rather filing a lawsuit, it is best to initially explore various dispute resolution alternatives, such as informal negotiation and mediation. If you are experiencing issues with a closely held business, please contact an experienced and skilled business lawyer at 617-669-9780. 

Your Business Definitely Needs a Standard Form Contract

Most, if not all, successful businesses that provide services and products to other businesses or consumers have a standard form contract. This contact essentially spells out the terms of any deal with a client or customer, as well as includes protections and contingency planning for your business.  A well-drafted business contract by a skilled business lawyer can provide substantial benefits to your organization, particularly when something "goes wrong" and a dispute arises.  I had litigated numerous cases where a business owner has justified their disregard for a contract by stating that "I have never had any issues before so why should I expect one in the future?" This is a short sighted approach to the reality that operating a business involves a substantial amount of legal liability.  Almost every business during its life cycle will encounter a legal issue, and when it does arise, a well-drafted contact will become a worthy investment and help protect your business if you end up in litigation. 

The words "standard form contract" is really a flexible term, and it is highly likely that each contact will be tailored to a particular deal or customer. The "standard" component will incorporate a contract structure, essential terms and conditions, as well as a deal structure. This contract will become part of your business best practices and will help your managers and employees enter into agreements that will not cause you additional legal headaches. Some of the "standard" components of a business contract include: 

 - Specific Services / Products  

- Pricing and Payment 

- Representations / Warranties / Limitation of Liability  

- Dispute resolution - Arbitration, preliminary injunction, and other rights. 

-Choice of Law / Venue 

These are just a few areas that should be addressed by any "standard" form business contract. If you have not yet invested in a business contract, please contact the Law Office of Stefan Cencarik, PLLC, business and contract lawyers that works closely with closely held businesses.  Or if you would like to ensure that your existing business contract meets your business and legal needs, please contact our contract lawyers at 617-669-9780 for a free consultation. 

Before You Develop and Release Your New App . . . Legal Issues to Consider

As our business and social communications become increasingly based on mobile devices, there will be a continuing need for new applications (apps). As such, there will continue to be a strong market for new app developers.  It may be that a group of like minded and talented individuals have decided to form a joint venture and create a new application.  Or it may the instance where one is tired of being an employee, and has developed the skills, network, and talent to improve an app and develop a new app. It is sometimes difficult to predict the market success of an app, however, once you realize the potential of your venture there are some important legal issues that one should consider. 

First, and foremost if you are developing a new app, and have not yet retained the services an a business law attorney, you may want to consider your options for forming a registered entity. In other words, you should strongly consider forming a corporation to organize your business and to set up a deal with the other founders.  If you intend on seeking any funding rounds from venture capitalists or other private investors, you should strongly consider Delaware as your state for incorporation. Delaware has favorable corporate laws and, most importantly for venture capitalists and investors who will own shares of your company, does not tax shareholders. 

The second issue to consider when developing a new app, and you will certainly need an attorney specializing in intellectual property and/or business (corporate) law to secure your rights to valuable app (intellectual property). You will need non-disclosure and non-compete (non-competition) agreements for your employees, independent contractors, investors, vendors, and other parties. You may need a trade mark to secure your rights to a particular name or tag line for your product of company.  You may produce various media, art, graphics, designs, or other written materials that require Copyright protection so that you may restrict others from publishing or profiting from your intellectual property without your permission.  Finally, you may have a process or method that is unique to your app, and you will require a patent attorney to assist you filing a patent application with the United States Patent and Trademark Office. 

Another issue to consider is how your have structured your partnership with the other founders or key managers of your new app company. Who owns what and what that ownership interest provides (in terms of profits), voting on important corporate matters, etc.  What happens when one of the founders disagrees with the direction of the company, and wants a "buyout?" How do you intend to handle the admission of new shareholders to the corporation, such as venture capital firms and other investors? These are but a few issues that any new app company must discuss with a small business lawyer in an effort to draft a shareholder agreement.  It is essential to put down the deal in writing during the early development stages of any company to avoid potential financial and legal issues at a later date.  

If you are seeking an attorney that can provide advice, counsel, and legal work for your new application (app) venture, please contact the Law Office of Stefan Cencarik, PLLC, a Lynnfield, Massachusetts business and intellectual property lawyer, at 617-669-9780 or visit www.northshorebusinesslaw.com. 

 

Does My Business Need a Trademark or Servicemark?

What is the difference between a trademark and servicemark? The word "trademark" is used in two senses: First, to define the legal concept that protects visual representations, and as a broad term that encompasses both trademarks and servicemarks.  In fact, Federal law specifically references trademarks, and makes little mention of servicemarks, however, those laws concerning trademarks apply equally to servicemarks.  In the case of a servicemark, it best to think of it as a type of trademark. 

A trademark is a word, phrase, logo, graphic symbol, or other device used to identify a good or product so that it may be distinguished from competing goods and services. A servicemark is used to identify a mark that markets, sells and distributes services.

When an application for registration is pending before the United States Trademark and Patent Office, you may use the ™ or TM symbol to declare that you have filed for registration of the trademark.  When an application for registration is pending before the USTPO, you may use the ℠ or SM symbol to denote that you have applied to register your servicemark. Upon approval of your application and registration of your trademark or servicemark, you may use the ® symbol to declare to the worlds that you own a valid registered trademark. 

If you have questions about when to use a trademark or servicemark, or combination of both, to identify your business, products, or services, you should contact an intellectual property attorney to determine the best strategy to protect your business assets. 

What is Trademark Infringement, and What Can My Business Do About It?

In order for your business to take advantage of the Federal rights and protections contained in the Lanham Act (the Federal trademark series of laws), you must first possess a registered trademark or servicemark.  If you have not already applied for a trademark or servicemark for your unique and valuable company name, company logo, product brand or service, you should consult a qualified business law and/or intellectual property attorney to discuss how you can protect your valuable assets.  This article will presume that a business has already received a certificate of registration of a trademark or servicemark from the United States Trademark and Patent Office.  What rights does this Certificate of Registration provide your business when you discover that a competitor or former employee (or ex-business partner) is now using your trademark? 

This blog article will focus strictly on trademark infringement, as this type of injury and civil claim is the starting point for any type of trademark dispute. (Future articles will discuss other claims and remedies concerning Cyber piracy and Unfair Competition).  

A claim for trademark infringement is rooted in 15 U.S.C. s. 1114, and declares use of a trademark without the consent of the owner to be unlawful.  Copying, counterfeiting, or imitating a registered mark in connection with the promotion / marketing, sale or distribution of goods and services, which is likely to cause confusion, a mistake, or deception to consumers qualifies as infringement. In other words, if a competing business is using a name logo to attract new customers that contains the same or very similar characteristics of your registered logo mark, you may have a claim for trademark infringement.  This is an oversimplified example, and each case is fact specific, therefore, only an intellectual property lawyer with litigation experience can determine whether your business is a victim of trademark infringement. 

If you learn that your registered trademark is being misused, then you may file a civil action in the United States District Court for the District of Massachusetts.  You will be able to obtain an injunction that prohibits further use of your mark; and in more egregious cases, obtain the profits earned by the infringer by use of the mark, recover losses incurred by your business due to the infringement, and costs of action. Prior to filing a civil action it is customary for an attorney representing the trademark holder to serve a cease and desist letter on the infringer. This will put the infringer on notice of your mark and potential claim.  

If your business already possesses a registered trademark and you suspect that you are a casualty of trademark infringement, it is best that you contact Attorney Stefan Cencarik to determine your rights under Federal law. 

Protect Your Brand and Identity: The Benefit of Trademark Protection

The intellectual property of your business is a valuable asset, and deserves the same protections as your other important business assets.  A small business typically invests a considerable amount of time, effort, and money towards developing a unique name and logo for their organization.  Those resources could go to waste, and the reputation and market for a particular business all could be in jeopardy if a competitor decides to use the same or similar logo or name.  What kind of confusion would it cause to the customers of a small business if a competing business set up a web-site or store that mimics your exact business? How would the bottom line of a business be affected by this type of scenario? And most importantly, what rights does a business owner have to prevent this type of activity?

A Federally registered trademark is the best method to restrict competition, former employees, vendors, independent contractors, and other parties from misusing your valuable name and logo for their own financial gain. A trademark also prevents these organizations and individuals from profiting at the expense of your business. A trademark is typically a visual representation, such as a design, logo, emblem, picture, or image that is associated with a business name, product or service.  A trademark allows a business to distinguish itself from its competition by providing it with a unique means of identification and brand identity.   

Applying for trademark protection is the best method to provide protection of your mark pursuant to Federal law. As soon as you file an application for trademark registration, you have the exclusive right to use your mark across the United States, and, upon approval of your application and Registration, your business will enjoy all the Federal rights and protections of a Registered ® trademark.  These rights include the ability to file a lawsuit for trademark infringement in Federal Court (United States District Court for the District of Massachusetts), which will allow you to recover damages (including lost profits and the infringer's unfair gains), legal fees and costs. You may also serve a cease and desist demand on any infringer and use the Registered trademark symbol to provide notice to any party that your mark is protected.  Your trade mark will also further your claim and demand to exclude any other entity or person from using your mark since you will be able to prove ownership and use of those marks. How do you intend to prove that you own a particular mark and used it prior to a competitor if you have not registered your mark? 

In this instance, the costs and benefits of retaining an intellectual property attorney outweigh the small cost of applying to register your mark.  The trademark process is not simply filing forms and paying a fee.  There is a substantial amount of due diligence that must occur prior to the filing of an application, then there is the technical application process itself along with subsequent filing requirement to ensure that your mark is protected throughout the life cycle of your business.  Attorney Stefan Cencarik, a small business lawyer in Lynnfield, Massachusetts, is able to assist with any intellectual property legal needs, including trademark or servicemark registration.  

 

The Importance of Buy Sell Agreements for Business Partners

Buy Sell Agreements can be an effective tool for eliminating any confusion or dispute when it comes time for a partner to exit a business relationship.  A Buy Sell Agreement is a contract between two or more business owners that specifies the terms and conditions for a "buyout" and exit for one of the owners. These agreements are sometimes embedded in an Operating Agreement for an Limited Liability Company (LLC) or a Shareholder Agreement for a Corporation. 

It is a common occurrence, at the beginning stages of a business, that the partners are so focused on fundraising, marketing, and management of the business that those individuals ignore the importance of organizational matters. In other words, the partners put off meeting with a business attorney to set out an agreement that will become essential when it comes time to transfer ownership of the business.  A Buy Sell Agreement should be viewed as a indispensable agreement that can structure a partnership arrangement, and ensure that the business founders set conditions for long term control and ownership of the organization. 

These types of agreements can avoid numerous issues and potential litigation as a result of a disagreement on the transfer of a founder's interest to a third party; termination of the founder's involvement or employment in the business; buyback of interest by the organization or other founders; or death, disability, or insolvency of one of the founders. 

One of the principal and most common features of a Buy Sell Agreement is a provision that provides other corporate shareholders or LLC members the rights to purchase the shares or interest held by the other owner.  For example, if an owner materially changes their involvement in the management and day-to-day affairs of the organization through resignation, or termination, then the Buy Sell Agreement would provide the remaining owners the automatic right to purchase the interest or shares held by the departing owner. The agreement should specify the method for determining the buyout price, such as: a predetermined value; valuation of the business; or formula. The agreement would also set out the time frames; methods of payment; process for valuation of the business; and other conditions of the partner's departure from the business. 

The other types of situations that necessitate a Buy Sell Agreement are changes in the financial, health, and domestic status of one of the shareholders or members.  A business partner could face severe financial troubles that could cause a partner to become insolvent, or subject to numerous lawsuits involving personal creditors. Those creditors may seek to attach any dividends or equity disbursements of the partner, or the partner may be placed in receivership or bankruptcy.  In those instances, a receiver or bankruptcy trustee would be looking to claim all profit rights of the owners, or liquidate the business interest to a third party. This is an undesirable position for the other business partners particularly in the context of a private, closely held organization where the affairs of the business, in part, would be exposed to a public court proceeding. 

Additionally,  it may be that a business partner enters a divorce proceeding, and it becomes important to preclude shares from being held by a former spouse. Finally, there are the health and life consequences of death, disability, and/or incompetence.  A business partner may be permanently unable to participate in the affairs of the business, and  this will create problems at the management and ownership levels since owners are also typically key employees of the business.  In each of these circumstances, a well drafted Buy Sell Agreement can specify the buyout process, conditions, and price for transitioning ownership of the business to the remaining partners. 

A properly drafted Buy Sell Agreement can help business partners can help make all of the expectations and conditions clear out the outset when it comes time for a partner to move on. Attorney Stefan Cencarik, a Boston area business lawyer, works closely with business partners and entrepreneurs to help create Buy Sell Agreements, and is available for consultation at 617-669-9780. 

Small Business Owners and the Personal Guaranty - How Can You Avoid Liability?

The easiest method of avoiding personal liability for a debt as a small business owner is to never sign a personal guaranty. However, banks and other institutional and private lenders are mindful that most start up businesses, entrepreneurs, and young businesses have very few valuable assets, thin capital, and unpredictable revenues to obtain sufficient security when issuing a loan. In other words, it is nearly impossible for a small business to obtain a loan without providing the lender the security of a personal guaranty in addition to other commonly used types of security, such as a collateral assignment of leases and rents, security agreement and UCC- 1 Financing Statement ("UCC-1"), or a mortgage  on the commercial property, and, sometimes, the owner's personal residence. 

It is all too common an occurrence that when a business owner decides to exit the business, wind down operations, or sell the assets of the business to a third-party, the personal guaranty may become a significant issue.  For example, if a business debt is owed to a bank for a commercial loan, and the business owner or partners decide to terminate business operations while the debt remains unpaid, it is highly likely that the bank will demand payment from the guarantor under the terms of the personal guaranty.  As another example, a business owner may be personally liable on a loan or lease agreement, and the assets of that business are being sold to a third party.  Not only does this create an issue if the bank holds a UCC lien on those assets, the question arises, for the business owner, as to how the debt will be satisfied so that he/she may be released from the obligations of the personal guarantee.  No business owner should sell a business or its assets, and remain personally liable on any of the business debts, particularly if the debt is tied to those assets.  

How does a business resolve the liability associated with a personal guaranty? 

The easiest way to manage a personal guaranty is to make payment arrangements, or negotiate a payoff of the debt and release of the guaranty.  In this instance, the lender will look for cash and may be willing to accept some type of equity or other type of security as consideration.  It all depends on the circumstances, as well as the viability and nature of the acquiring business. 

The other method of dealing with a personal guaranty is litigation.  If you fail to pay a debt upon reasonable demand of the lender under the terms of the personal guaranty and promissory note, then it is likely that you will be dragged into a state court legal proceeding. Litigation is costly, time consuming and expensive for all participants.  If you are defending the enforcement of a personal guaranty, the best method of defense is equitable principals. In this instance, you are relying on the lender's acts and omissions during loan issuance and administration to provide you with an equitable defense to enforcement. For example, has the lender negligently handled the loan by failing to notify the guarantor of material changes in the loan, such as loan amounts, credit line increases, term, and the like? Did the lender take actions that indicate that it waived its rights to enforce the guaranty, or did it enter into another agreement that satisfies the debt, in full or part? Did the lender fail to adequately provide adverse information concerning the business financial affairs that somehow increased the guarantor's risk?  Did the lender allow the default and permit the debt to accumulate interest and principal? These are all questions that any Boston area business owners should ask when faced with a personal guaranty. 

There also may be issues with the personal guaranty document itself. The document may fail to properly identify the parties; capacities in which the parties have signed; failure of consideration; the guaranty could be a payment guaranty or a collection guaranty;  or some other type of technical issue with the personal guaranty. However, it is highly likely that lenders have learned from mistakes of their own, mistakes of others, and/or have hired skilled lawyers to draft the personal guaranty.  In this instance, the best hope for some type of technical issue is that the lender obtained the guaranty from an unqualified attorney or used downloadable form obtain from an Internet legal form retailer. 

Finally, there is reorganization and/or liquidation in a bankruptcy proceeding.  This is typically the final option for most business owners, and is not desirable for those wishing to keep their financial affairs out of public view, and out of the hands of a bankruptcy trustee. 

As outlined above, there are narrow circumstances that permit a Massachusetts business owner to avoid personal liability for a business debt and/or personal guaranty.  If you or any business owner or a group of business partners have questions about liability under a personal guaranty, Attorney Stefan Cencarik, a business lawyer serving the Boston area, is available for consultation at 617-669-9780. 

Independent Contractor vs. Employees in Massachusetts

Employers beware that the Commonwealth of Massachusetts treats nearly all workers as employees through strict interpretation of the characteristics that qualify a worker as an independent contractor. Equally important is the fact that the State treats enforcement of the independent contractor laws  as priority, and both civil and criminal penalties can be levied against businesses, in addition to injunctions and other orders for compliance. Massachusetts targets employers who fail to properly classify workers as independent contractors.  The State is well aware that businesses often improperly classify employees as "independent contractors" in an effort to avoid paying for or providing benefits to the worker, and/or avoiding tax and other witholdings, as well as payment of unemployment and worker's compensation insurance premiums. 

M.G.L. ch. 149 s. 148B, declares that all workers are to be considered employees, unless the circumstances and nature of that individual's employment meet all of the following criteria:

 1.  "The individual is free from control and direction in connection with the performance of the service, both under his contract for the performance of service and in fact." In other words, your business cannot retain management control or authority over the manner and means of the worker's performance of their duties and tasks.  The worker must be free to perform any work at their own control, discretion, professional standards, and time frames. 

2. "The service is performed outside the usual course of the business of the employer." If the worker performs work that relates to or provides support for the nature of your business, that individual is an employee.  For example, a computer engineering firm cannot classify a software  analyst as an independent contractor, however, it can hire an attorney or certified public accountant at another firm to perform those specific professional services.  This is the strictest factor of the Massachusetts independent contractor statute, and most businesses fail to meet this criteria.  

3. "The individual is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed."  The worker must perform a service that is distinguishable and separate from the business, and that service is customarily provided in that worker's profession or business.  

If your classification of workers fails to meet one of the above three criteria, then your worker must be classified and treated as an employee.

Failure to properly classify and treat workers as employees can result in a significant amount of liability for an employer. If you fail any of the above criteria, and then do not provide vacation, sick, and leave benefits; fail to pay tax and witholdings; fail to pay worker's and unemployment insurance premiums; and allow other benefits (such as Maternity Leave or Family Medical Leave Act (FMLA)), you will be subject to both civil and criminal liability.  For example, an aggrieved employee who has been misclassified as an "independent contractor" may file a complaint with the Massachusetts Attorney General's Office, and then may be provided with a private right to initiate a civil action against your business.  This lawsuit may enable an employee to recover lost wages, plus the monetary value of the lost benefits, plus treble damages and legal fees.  If a business has misclassified employees in a widespread basis, it could be exposed to numerous claims involving substantial damages and penalties for failing to comply with Massachusetts independent contractor law.  This scenario could potentially end in disaster for a business. 

 

Don't Forget Your Annual Report Deadlines

In Massachusetts, all organized and registered entities are required to file an annual report with the Massachusetts Secretary of State, Corporations Division, and pay the applicable annual fee. Depending on the type of entity that you operate, the deadlines for filing annual reports vary. Make sure to mark your calendar and stay on top of these deadlines so that you can maintain the legal status of your entity. 

Domestic (Massachusetts) and Foreign Corporation - File 2.5 months from the end of the fiscal year.  For most corporations ending the fiscal year on December 31st, this means the annual report must be filed no later than March 15th. 

Domestic and Foreign Non-Profit Corporations - File by November 1st.  This excludes churches, hospitals, religious organizations, schools, universities and colleges, and some library institutions. 

Domestic and Foreign Limited Liability Company (LLC) - File by the anniversary date of the LLC.  This means that the date that the entity was organized in Massachusetts, which will vary for each LLC. 

Recall from past blog entries that filing the annual report for your business is crucial for a number of reasons.  The most important reason is that if you do not file your annual reports and pay the application fee to the Secretary of State in Boston, he will administratively dissolve your entity. Upon dissolution, you are no longer a legal entity and have no authority to conduct business, such as entering into contracts, filing a lawsuit on behalf of the entity, etc. Based on past experience, it sometimes takes several years of unfiled annual reports and fees to accumulate before this occurs, however, there are reported instances where dissolution can occur after a number of months. It really depends on how quickly the Secretary of State Office discovers that your reports and fees are delinquent. It is an all too common occurrence that many businesses discover after several months (and sometime years) that the entity was dissolved, which leaves business owners scratching their heads as to what types of new issues may present themselves as a result of dissolution.  It is, therefore, recommended to stay on top of the annual report and fee deadlines and requirements, or contact a business lawyer if your business lies in a state of dissolution.   

 

 

Holding Business Officers and Directors Personally Liable: Part II

On November 4, 2015, the Law Office of Stefan Cencarik, PLLC, a Boston business lawyer, explained the criteria for disregarding the corporate entity, so that shareholders and corporate directors may be held personally liable.   This blog article will focus on the State statutory exceptions that permit direct liability of officers. 

 The Massachusetts Wage Act, M.G.L. ch. 149, § 148 – The Wage Act holds the president and treasurer of a corporation and any officers or agents having the management of such corporation: liable for the non-payment of wages to employees. In other words, Massachusetts business owners and top level managers can be subject to civil liability for non-payment of wages to employees. Those individuals will be personally responsible for payment of any overdue wages plus any double or treble damages  and legal fees awarded by judgment of a Massachusetts Court. In other words, failing to pay employees earned wages has severe consequences in Massachusetts. 

Worker's Compensation, M.G.L. ch. 152 - An employer is required to provide its employees worker's compensation insurance, and failure to do so will subject a corporation's president and/or treasurer to civil penalties, fines up to $1,500 and imprisonment up to one year. In this instance, the corporate veil cannot protect the officers of a corporation who fail to pay worker's compensation premiums. 

Massachusetts Withholding Tax, M.G.L. ch. 62B, s. 5 - Massachusetts employers and businesses paying wages to employees are responsible for withholding and paying tax to the Massachusetts Department of Revenue. Failure to withhold and pay taxes will subject the corporation officer or LLC manager to personal liability, and that person will be liable to the DOR for payment of the tax, until the business turns-over all overdue tax payments.   

Massachusetts Minimum Wage, M.G.L. ch. 151 - In Massachusetts, it is considered oppressive and unreasonable to pay any worker less than the applicable minimum wage. ($9.00 per hour in 2015; $10.00 per hour in 2016; and $11.00 per hour in 2017 and beyond).  Businesses that pay employees less than the statutory wage (docking wages; failing to pay interns or "temps") are presumed to be in violation of minimum wage laws and the corporate officers may be held personally liable. 

Despite these statutory exceptions to the corporate veil, a corporate officer will not be able to use the limited liability protection of the corporation to obtain immunity for criminal actions and/or intentional torts, such as assault and battery of a fellow co-worker.

The next blog article on holding corporate officers personally liable will address the Federal statute and case law exceptions to limited liability. 

Setting Up Shop in Massachusetts From Out of State

Are you an out-of-state business or entrepreneur interested in expanding your businesses into Massachusetts? If so, stop reading, pick up the telephone and call a Boston area small business lawyer immediately.  Doing in business in Massachusetts can be a lucrative venture, however, this state has a well deserved reputation for being a consumer (and Plaintiff) friendly jurisdiction, and there are many state laws and regulations that determine how a business may operate and conduct its affairs. Depending on your industry, type of business, and procedures for operating under the laws of your home state, you could potentially expose yourself to both criminal penalties and/or civil liability when you begin operating in Massachusetts. The worst way to start off your business is to receive a cease and desist letter from the Massachusetts Attorney General's Office.  

The starting point for any out-of-state business that desires to set up shop in Massachusetts is to register as as foreign entity with the Massachusetts Secretary of State, Corporations Division in Boston. M.G.L. Ch. 156C, s. 48 and M.G.L. ch. 156D s. 15.03 requires that all entities conducting business in Massachusetts must register as a foreign entity within 10 days.   You will be required to file a relatively simple application, a certificate of good standing from your home state, and pay a filing fee.  If you do not intend to maintain an office or other commercial space in Massachusetts, you also need to find a registered agent for service of process.  There are many professional agents for service of process in downtown Boston that will serve as your nominee agent, and take responsibly for timely notifying you of any process that was served on you. 

You will also need to investigate and adapt to the specific regulations and licensing requirements for your industry and type of business. This is the more complex issue for most out of state businesses.  It also is possible that you need a permit or license at the state or city/town level, or both. Finally, if you conduct business in a different name than your legal entity name, you will need to file a d/b/a certificate with the city or town that you are doing business in. 

If you have questions about how to expand you business into Massachusetts, Attorney Stefan Cencarik can be reached at 617-669-9780.   

 

The Sword and Shield - Non-Disclosure Agreements in Massachusetts

What purpose do Non-Disclosure Agreements (NDAs) serve, and why would I want to "complicate" my relationships with employees, other businesses, and investors?  The time for hand shake deals and unspoken understandings is over. No matter how strong your relationship with any individual or company, relationships and attitudes can change in an instant.  It is, therefore, impossible to predict how employees, other businesses, and investors will treat your private discussions, sensitive information, and intellectual property when a relationship suddenly deteriorates.

A non-disclosure agreement (NDA) drafted by a qualified Boston business lawyer will act as your shield and sword. What types of instances call for a NDA, and what types of benefits do these agreements provide your business? There are numerous situations that call for a non-disclosure agreement (NDA): 

- Protection of intellectual property internally - What measures to do you have in place to protect your contact lists, special methods,  unique processes,  knowledge base and best practices, formulas, and other trade secrets from your employees?  What is preventing your employees from quitting their position at your business, and then starting a new competing business in your market? What is precluding a key employee or manager from working for your competitors?  Intellectual property, in general, can be the essence of any Massachusetts business, and the exposure or misuse of this information could negatively impact the revenues of a business.  

An NDA can preclude internal misappropriation of intellectual property by entering into a contract that specifies the ability of a party to disseminate, use, copy, or appropriate intellectual property.  Typically, an NDA will provide the business a right to seek an injunction from a local Court so as to obtain an order to prevent the party from violating the terms of the NDA.  This Court order will compel the party to abide by the terms of agreement, or face any penalties for contempt of court. 

- Protection of intellectual property externally - What types of limitations do you place on external entities or individuals who may need to use your intellectual property from time to time? What rights do your consultants, strategic partners, and other parties have to your intellectual property, and what happens when  you stop doing business with one another. A well drafted NDA can set parameters on the use of your intellectual property outside of your business. And you will have an enforceable contract with pre-determined remedy for enforcing your rights to prohibit misuse of your property.  

-Confidentiality of sensitive discussions - How would your key employees, managers or minority shareholders or members react if they discovered that you were considering offering your ownership interest for sale? What do you think your competition would do if they found out that you were considering merging with another company, or planned on laying off a portion of your workforce? Would you want your proposal disclosed to a party other than your potential new customer? The list of the types of sensitive business discussions that need to remain confidential are endless.  A well drafted NDA can restrain other parties from disclosing information that may provide other parties a competitive advantage, or the disclosure of information that could negatively effect a business.  

The few examples above show that the benefits of an NDA far outweigh any concerns for complicating or scaring others while doing business in Massachusetts. It is, therefore recommended that you have a qualified business lawyer review your non-disclosure agreement, and other business contracts to ensure that your rights are protected and that they comply with Massachusetts law. And, if your business is not using a NDA, it is highly recommended that you accept that this protective measure is a best practice.  

Company Policies and Employee Manuals: Dust Collecting Binders or Necessary Safeguard?

Hiring employees for your Massachusetts business entails a significant amount of responsibility and legal liability.  What is your policy for addressing particular circumstances that will, without a doubt, occur during the operation of your business?  In other words, what is your paid and unpaid leave policy? What is your sexual harassment or violence in the workplace policy? What are the rules for performance and conduct of employees in the workplace? What is your procedure for termination of employees? These types of questions and significant concerns for your business can continue in perpetuity. 

Regrettably, most small businesses do have an oral (or unofficial) policy for addressing these types of circumstances, or have some semblance of how to deal with these problems as they arise.  However, this approach will not reduce the risk of an employee lawsuit for wrongful termination, unpaid wages (subject to treble damages and attorneys fees under the Massachusetts Wage Act), and other grounds for suing an employer for damages.  Most small businesses with 1 to 25 employees do not have company policies and an employee handbook. The reason is that these small businesses operate lean and mean, or have rapidly expanded to the point that they do not have the time and resources to structure the internal affairs of the organization. This oversight can be disastrous when an incident occurs or dispute arises, and a former employee hires an attorney to file a lawsuit against your business.  

At a minimum, all businesses should have a basic set of written company policies, including: At will employee policy; sexual harassment policy; anti-harassment policy; anti-discrimination policy; safety policy; Method and frequency of payment of wages; COBRA and mini-COBRA (Businesses with 20 or more employees); Breaks and facilities for nursing mothers; Maternity leave; Military leave, and

A Massachusetts small business should also have a basic employee manual that recites company policy, as well as states rules and procedures for: Orientation; Use of company technology and equipment (Cell phone, Internet, E-mail, and Computer); Compensation; Confidentiality and non-disclosure; Intellectual property; Drug use and testing; Non-smoking; Conduct; and Termination.  

Off the shelf or downloadable Internet forms containing template company policies and employee manuals are not enough to protect your business. These templates may not be in compliant with Massachusetts law, and are not tailored to your specific business needs. They may also be incomplete, poorly drafted, or written so as to protect the employee and NOT your business. Remember that if an employee files a lawsuit against you, your written policies will be strictly interpreted against you. And not having any policies at all can put the success and health of your business at risk. 

The Law Office of Stefan Cencarik, PLLC specializes in assisting small businesses and entrepreneurs in Boston and its surrounding areas, including Suffolk, Middlesex, and Essex counties.  To discuss whether your business is in compliance or protected against potential liability, please contact Stefan Cencarik, your business lawyer, at 617-669-9780.