California is Serious About Privacy – Does Your Business Have a Roadmap to Comply with California Law?
By now, many companies who do business with California residents are familiar with the California Consumer Privacy Act of 2018 (“CCPA”), which became effective on January 1, 2020. The CCPA is one of the most comprehensive privacy laws in the country. Despite some familiarity with its requirements, compliance with the CCPA brought many challenges for business owners and their management teams. Violations of the CCPA can be extremely costly — up to $7,500.00 per intentional violation and $2,500.00 per unintentional violation.
Under the CCPA, businesses that collect personal data from any California resident must meet several obligations:
(1) posting a Privacy Notice on the business’s website;
(2) providing account verification;
(3) to not sell personal data pertaining to children;
(4) providing timely responses to residents’ requests that the business delete their personal information or provide residents with information concerning what personal information the business has collected relating to that resident; and
(5) providing timely responses to residents’ requests that the business not sell the resident’s personal data.
Shortly after the CCPA’s effective date, the California legislature passed the California Privacy Rights Act (“CPRA”) on November 3, 2020. The CPRA will become effective January 1, 2023 and will apply to all personal data collected by a business on or after January 1, 2022, with certain exceptions.
Among other things, the CPRA added obligations to the CCPA pertaining to:
(1) Sensitive personal information;
(2) Automated decision-making;
(3) Consumer profiling; and
(4) The formation of the California Privacy Protection Agency.
As if compliance with the CCPA and CPRA are not enough to pose significant challenges for businesses who serve California residents, numerous other California laws pertain to privacy and data security, such as the California Data Breach Law, the California Online Privacy Protection Act, the Shine the Light Law, and the California Invasion of Privacy Act.
If you are a business owner who does business with California residents and need assistance navigating the expansive and ever-changing legal landscape of privacy law, please contact Natalie A. Remien at firstname.lastname@example.org or (312) 368-0100.
It is rare if a business has not experienced a bodily injury claim such as a slip-and-fall in a retail store, or an accident at a construction site. In Illinois, those claims are ordinarily governed by common law negligence principles. An injured party who prevailed at trial was entitled to recover medical expenses, loss of earnings, pain and suffering, loss of normal life, disfigurement, increased risk of future harm, and 9% annual post-judgment interest—but not pre-judgment interest.
That has changed, and businesses should be aware that an injured party can now recover pre-judgment interest pursuant to a recent amendment to Illinois’s Prejudgment Interest Statute, 735 ILCS 5/2-1303, which took effect on July 1, 2021. Now, pre-judgment interest on bodily injury claims begins to accrue at the rate of 6% annually “on all damages, except punitive damages, sanctions, statutory attorney’s fees, and statutory costs” on the date the lawsuit is filed. Significantly, only private businesses are on the hook for pre-judgment interest, as governmental entities have been expressly excluded.
Business owners should be concerned about this new law. While not all bodily injury claims have merit, of course, the statutory amendment puts business owners in a precarious position. If a business seeks to contest a bodily injury claim that it believes is meritless, it has a proverbial “Sword of Damocles” hanging over its head because pre-judgment interest is now recoverable in addition to all other damages. The amount of interest can be significant, since bodily injury claims can take years to reach trial. In essence, the amendment can be viewed as taxing a business that is merely exercising its right to contest a claim.
Thus, it is expected that the recoverability of pre-judgment interest in bodily injury claims may force more businesses to consider settling claims that they otherwise would have taken to trial before a jury. Additionally, businesses should confirm that their insurance policies extend coverage to awards of pre-judgment interest under the new statute.
If you have questions regarding the impact of these claims on your business, or whether your business has the appropriate insurance coverage in place, please contact Roenan Patt at email@example.com or (312) 368-0100.
The importance of perfecting a security interest by filing a UCC-1 financing statement cannot be understated. Likewise, making sure the UCC-1 financing statement is accurate and has not lapsed is just as important. The case of Committee of Unsecured Creditors of Rancher’s Legacy Meat Co. v. Ratliff emphasizes the importance of ensuring that a UCC-1 financing statement is accurate and has not lapsed.
In Ratliff, James Ratliff provided loans to his business partner to form Unger Meat Company in 2010. Ratliff secured his loans through obtaining a security interest in Unger’s equipment, inventory, accounts receivable, furniture and fixtures. Ratliff perfected his security interest by filing a UCC-1 financing statement. On May 6, 2014 Unger changed its name to Rancher’s Legacy Meat Co. Ratliff failed to timely amend his UCC-1 financing statement to reflect the change in the company name and the UCC-1 financing statement lapsed. Even though Ratliff’s original UCC-1 filing lapsed, he filed two separate UCC-3 amendments in an attempt to protect his security interest.
In 2019, Ratliff began collection proceedings on his loans. Rancher’s Legacy Meat Co. filed for Chapter 11 bankruptcy in response to Ratliff’s attempt to collect on his loans. Ratliff asserted what he believed was priority in collection of his security interest. In response, the Committee of Unsecured Creditors argued that Ratliff did not have a valid security interest because his UCC-1 financing statement lapsed and so did his security interest. The Committee also argued that Ratliff’s subsequent UCC-3 amendments were invalid because they could not continue a security interest that no longer existed. The bankruptcy court agreed with the Committee, holding that Ratliff was an unsecured creditor and not entitled to adequate protection payments.
Ratliff emphasizes the importance of not only filing a UCC-1 financing statement to perfect a creditor’s security interest, but also making sure amendments are timely made so that the security interest does not lapse. If you require any help navigating UCC issues, feel free to contact Michael L. Weissman, an attorney in the commercial law practice at Levin Ginsburg, at firstname.lastname@example.org or any of our business attorneys.
When disaster such as fire, explosion, or other event strikes and damages a business to the point of interrupting operations, the business owner will turn toward its insurance policy and business interruption coverage (if available) to alleviate the financial fall out. Business interruption policies generally provide coverage for lost income and extra expenses that a business sustains due to a “covered peril” (i.e. an explosion or fire) that “causes direct physical injury or damage” to the business’s real or personal property. Some business interruption policies also provide insurance coverage for indirect losses due to acts of “civil authority” or “supply chain disruptions.” Conversely, some business interruption policies contain exclusions for damages caused by a virus.
In the new COVID-19 world, businesses are now asking whether a pandemic is a “covered peril” or whether a government ordered shut-down triggers insurance coverage. Many businesses that have been deemed “non-essential” by state governments have either been closed or have had a substantial reduction in business revenue (such as restaurants providing only for curb-side or delivery). Businesses that have paid their insurance premiums for years have turned to their insurers for coverage and finding declination letters instead of open arms. Many insurers have taken the position that businesses closed by government action have not sustained damage that caused “direct physical injury or damage” to the business’s real or personal property. Insurance companies have argued that because the closure was to prevent exposure to COVID-19, the interruption is not a “covered peril.” Additionally, many business interruption policies contain a “viral exclusion” that insurers are invoking to deny coverage.
Several businesses have sought court relief upon learning that their insurers have denied coverage. Insurance coverage and bad faith lawsuits have already been filed in several states, including Illinois, California, and Missouri, challenging the insurers’ decision to deny coverage. Arguments advanced by the businesses include the claim that COVID-19 causes physical damage to the businesses’ real property because the virus physically infects and stays on the surfaces of objects or materials for weeks. Insurers will vigorously defend these coverage challenges and it is expected that litigation will be ongoing for years.
Because an insurance policy is a contract, the language contained in the policy itself is the best place to begin the coverage analysis. While reviewing your policy, some of the key questions to ask are:
- Do you have business interruption coverage?
- Does your policy specifically have coverage for a viral outbreak or pandemic?
- Does your policy allow for coverage for acts of “civil authority” or “supply chain interruption?”
- Does your policy exclude coverage for viral outbreak?
If you have questions regarding your insurer’s coverage obligation with respect to the COVID-19 crisis, please contact:
An often overlooked contract provision has now gained the spotlight in the wake of the COVID-19 pandemic. Parties to a contract are now considering whether a contractual force majeure (French for “superior force”) clause will play a critical role in determining whether or not performance is still required. Force majeure provisions typically consist of boilerplate language that generally excuse performance for “acts of God or other unforeseen circumstances that make performance impossible” but may also contain specific language identifying several events that could constitute a force majeure such as “acts of government,” “war,” “famine,” “hurricanes,” or “acts of terrorism.” Depending on the jurisdiction, not all force majeure provisions are created equal.
In order for force majeure to be applicable to a contract under Illinois law, the agreement must explicitly contain such a provision. If no provision exists, force majeure cannot be utilized as an excuse for non-performance. If a contract has a force majeure clause, depending on the jurisdiction, the party seeking to invoke the clause must typically demonstrate that the force majeure event was one of the events contemplated by the language of the provision, the event was unforeseeable at the time of contract, and that the event materially impacted, or rendered impossible, performance. Additionally, the affected party may be required to make a bona fide effort to perform under the contract and in doing so demonstrating that performance is impossible. Finally, if the force majeure clause contains a notice provision, it must be strictly complied with.
Even if a force majeure provision does not cover the COVID-19 pandemic, the parties to the contract may also have to contend with excused performance under Article 2 of the Uniform Commercial Code (for the sale of goods) or the common law doctrines of impossibility of performance or commercial frustration. Article 2 of the UCC codifies a form of force majeure for performance that has been made impracticable “by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any applicable foreign or domestic governmental regulation or order.” Alternatively, the common law doctrines of impossibility of performance or commercial frustration require a fact intensive analysis. However, the commonality of both doctrines is a need for an unforeseeable event such as COVID-19.
If you have questions regarding how the COVID-19 crisis may impact contractual performance, please contact either:
Howard L. Teplinsky at: email@example.com or (312) 330-6472
Roenan Patt at: firstname.lastname@example.org or (312) 368-0100
or any of Levin Ginsburg’s business attorneys.
Yesterday the President signed into law the Emergency Families First Coronavirus Response Act (H.R. 6201) (the “Act”) which provides for emergency family medical leave and emergency paid sick leave. Employers must comply on or before April 2, 2020.
Here’s the benefits the Act provides for employees:
Emergency Family Medical Leave Applies Only to Child Care Disruption
The Act significantly amends and expands The Family and Medical Leave Act (“FMLA”) on a temporary basis for employers with fewer than 500 employees, and certain public-sector employers. The Act allows for up to 12 weeks of job-protected leave for an eligible employee (e.g., an employee must have been on the payroll for 30 calendar days) for “a qualifying need related to a public health emergency.” An employee has a “qualifying need” when the employee is unable to work or telework in order to care for a son or daughter that is out of school or unable to go to childcare due to a public emergency.
Under this Emergency FMLA leave, the first 10 days are unpaid. An employee may elect to use vacation, sick leave or other leave offered by an employer in order to be paid during the first 10 days. During the remaining 10 weeks, an employee on leave is paid at two-thirds the employee’s regular pay. The new changes cap this pay at no more than $200 per day and $10,000 in total.
This Emergency FMLA leave is job protected leave and as a result an employer must restore the employee to their prior or equivalent position once the employee returns to work. There is an exception for employers with less than 25 employees, if the position was eliminated due to changes in the business as a result of a public health emergency.
The Act also allows the Secretary of Labor to exclude from the definition of employee (1) health care providers; (2) emergency responders, and (3) to exempt small businesses (i.e. less than 50 employees) if following the Act’s requirements would jeopardize the business. The Act also allows an employer to not provide the Act’s FMLA entitlements to employees who are health care providers or emergency responders.
Finally, the changes appear to also exempt employers with fewer than 50 employees in a 75-mile radius from civil damages under the FMLA. As a result, small employers are exempt from civil damages
These Emergency FMLA leave provisions are scheduled to end on December 31, 2020.
Emergency Paid Sick Leave
The Act requires employers with fewer than 500 employees and certain public employers, to provide 10 days of emergency paid sick leave to any employee falling in one of the following categories:
- Employees that are subject to a government quarantine related to COVID-19;
- Employees that have been told by a health care provider to self-quarantine due to COVID-19;
- Employees that are showing symptoms of COVID-19 and seeking a medical diagnosis;
- Employees that need to care for an individual subject to a government quarantine related to COVID-19;
- Employees that need to care for a son or daughter that is out of school or unable to go to childcare due to COVID-19; or
- “The employee is experiencing any other substantially similar condition specified by the Secretary of Health and Human Services in consultation with the Secretary of the Treasury and the Secretary of Labor.”
Employees are automatically entitled to the sick leave benefits irrespective of how long they have been on the payroll. However, an employee’s sick time cannot carry over from 1 year to the next. An employer may deny health care providers or emergency responders the sick leave benefits provided by the Act.
The Act also allows the Secretary of Labor to (a) exclude health care providers from the definition of employee; (b) exclude emergency responders from the definition of employee, and (c) to exempt small business (e.g. less than 50 employees) if following the Act’s requirements would jeopardize the business.
The Act also caps paid sick leave at $511 per day ($5,110 in total) if the leave is for reasons 1- 3 above relating to the own employee’s condition and $200 per day ($2,000 in total) for leave that is taken for the reasons set forth in 4-6 above, where the employee is caring for others.
Like the FMLA provision, an employer may not retaliate against an employee who takes any emergency paid sick leave. Further, the Act treats the failure to pay sick leave as a violation of the Fair Labor Standards Act and as a result the employee would be entitled to liquidated damages and attorneys’ fees in the event of a successful lawsuit. Employers must also post, and keep posted, a notice that will be prepared and approved by the Secretary of Labor (which shall be made available within 7 days after the enactment of the Act).
Please reach out to your LG attorney to discuss how these changes could impact your business.
Minimum wages are rising across the country, with well over a dozen states, plus many cities increasing minimum wages over the past few years. As those changes are implemented, restaurant owners are finding that they must make significant adjustments to how they run their businesses in order to stay in business.
The Bay Area of California was one of the first regions to begin increasing minimum wages, and as of January 1, 2018, the minimum wage increased by 37 cents to $13.23 in Oakland, and in San Francisco it rose from $13.00 to $15.00 effective July 1, 2018.
One impact on the restaurant industry is the change from full service restaurants – with hosts and full waiter service – to counter service. Some restaurants have actually seen such changes result in significant sales increases – by as much as 20% – after the change from full service to counter service. And at the same time, being able to reduce menu prices due to the ability to cut staff due to the change to a counter service format. The downside here is that there are fewer jobs available to restaurant workers with owners focused on a lean labor paradigm. At some restaurants, cooks serve dual roles – both preparing food and delivering it to customers. Customers are also finding themselves taking on new ‘responsibilities’ such as being able to text additional orders rather than going back in line it they want more food than they originally ordered at the counter.
Thus, the increase in minimum wage has resulted in more satisfied employees (albeit fewer) earning a better living, increased restaurant industry innovation, and restaurants becoming more accessible to the population as whole as a result of lower menu prices.
Seattle became the first major city in the country to pass a $15.00 minimum wage law in 2014. Large restaurant groups and franchises were particularly concerned about the increase because employers with more than 501 workers were required to increase wages on a set schedule reaching $15.00 per hour this year. As a result, large Seattle restaurant groups and chains were forced to look for ways to adjust and innovate. Many felt that increasing menu prices was not an option because of concerns that such increases would result in lower revenue. So these restaurants did away with discretionary tipping and, instead, implemented set service charges of fifteen or twenty percent.
To offset rising labor costs, some restaurants add a surcharge of three to five percent to customers’ checks. In March of last year, the Wall Street Journal even ran an article entitled “New on Your Dinner Tab: A Labor Surcharge.” Restaurant owners found that raising menu prices lead customers to choose less expensive items than they normally would, and that the surcharge helped mitigate the increased costs of doing business.
In addition to raising prices, in order to deal with increased wages in the restaurant industry, some businesses often cope with minimum wage increases by firing staff. Earlier this year, Red Robin Gourmet Burgers announced it would eliminate busboy positions at 570 restaurant locations. Many single location restaurants have also had to eliminate busboys and other staff positions. Others have not been able to adapt and have had to close their doors. Some have turned to technology to compensate for the loss of labor and to reduce expenses. Large chains such as Chili’s, Applebee’s, and Olive Garden have replaced some servers with table-side tablets for placing orders and paying bills.
Technology has also helped other businesses expand. For example, popular online service, GrubHub, has reduced the number of customers dining out, as consumers can enjoy a restaurant style meal without getting up off their couch.
The takeaway for restaurants facing increasing minimum wages and labor costs? Scrutinize your budget and personnel and determine how to satisfy ever-changing employee and customer demands, and be willing to change.
For further information regarding this topic, please contact:
Jonathan M. Weis at email@example.com or 312-368-0100.
In approximately a dozen states and a number of smaller municipalities across the U.S., initiatives have been introduced that would allow state and local governments to dictate how restaurants (and retailers) schedule their employees. Some view this approach as interfering with employers’ rights to control the workplace, while others view it as a necessary tool to protect the rights of food industry and other retail workers. The impetus for the new rules – often referred to as predictive scheduling laws – emanates from the fact that workers often have very little ability to make adjustments to their work schedules in order to meet their responsibilities outside of work. Unpredictable and unstable work schedules have been fairly well documented in the food service and preparation industries, as well as in retail and custodial occupations.
Predictive scheduling laws and proposals generally include certain common provisions: (i) advance posting of schedules, (ii) employer penalties for unexpected schedule changes, (iii) record-keeping requirements, and (iv) prohibitions on requiring employees to find replacements for scheduled shifts if they are unable to work. In Congress, the pending Schedules That Work Act would require that schedules be provided in writing two weeks in advance with penalties for changes made with less than 24 hours’ notice. As those changes are implemented, restaurant owners are finding that they must make significant adjustments to how they run their businesses in order to stay in business.
“On-call” or “predictive scheduling” activists argue that retail employers too often use scheduling practices that directly interfere with employees’ personal lives and ability to plan around their work hours, while others believe government intervention in the scheduling of employees through a one-size-fits-all approach intrudes on the employer-employee relationship and creates unnecessary mandates on how a business should operate. Many in the food service industry are concerned that predictive scheduling legislation will impede employers’ need to adapt to changing conditions in a store, particularly small, independently owned businesses that have limited staff and resources and may not be able to afford the penalties related to violations. Some employees have also voiced concern that they could lose some of the flexibility that attracted them to the food service industry in the first place.
There are a variety of common components of predictive scheduling legislation.
- Employee Scheduling Requests. Giving employees the right to make scheduling requests without employer retaliation. Employers would be required to consider scheduling requests from all employees and provide a response. In some instances (for healthcare issues for example), the employer would be required to grant the request unless there is a bona fide business reason not to do so—e.g., an inability to reorganize work among existing staff or the insufficiency of work during the periods the employee proposes to work. The right to request provision can be found in laws recently enacted in Vermont, New Hampshire, Seattle, Washington, and San Francisco and Emeryville, California. (Similar laws have been in place for more than a decade in the United Kingdom.)
- Shift Scheduling Changes. Requiring employers to be pay employees for a minimum of four hours of work or the minimum number of hours in the scheduled shifts, whichever is fewer, when an employee is sent home from work early without being permitted to work his or her scheduled shift. In addition, if an employee is required to call in less than 24 hours before the start of a potential shift to learn whether he or she is scheduled to work, an employer could be required to pay the employee a premium, equivalent to one hour of pay. This provision is found in eight states and the District of Columbia.
- Split shift pay. If an employee is required to work a shift with nonconsecutive hours with a break of more than one hour between work periods, an employer could be required to pay the employee a premium for that shift, equivalent to one hour of pay. Provisions like this exist in District of Columbia and California.
- Advance notice of schedules. When an employee is hired, an employer could be required to disclose the minimum number of hours an employee will be scheduled to work. If that minimum number changes, the employer could be required to give the employee two weeks’ notice of the new minimum hours before the change goes into effect. In addition, employers can be required to give employees their work schedules two weeks in advance and, if an employer makes changes to this work schedule with notice of only 24 hours or less, the employer could be required to pay the employee a premium, equivalent to one hour of pay. San Francisco, Seattle, New York City, and Emeryville, California have enacted laws to require employers to provide two weeks’ advance notice of schedules to employees in certain large retail and/or food service establishments.
In order to handle predictive scheduling mandates, business owners should explore software options and even retaining outside vendors that provide scheduling and labor management solutions. A lack of training or understanding of predictive scheduling can be detrimental to a business’ bottom line, and scheduling practices can have a dramatic impact on labor costs. As with most new legal developments in the food service industry (or any industry for that matter), training and education is key.
In 2018, Governor Bruce Rauner signed into law a number of changes that are already in effect or will go into effect starting January 1, 2019. As with each New Year, it is important to reflect on those changes and how they impact your business.
Amendments to the Illinois Wage Payment and Collection Act
As of January 1, 2019, all employers will be required to reimburse its employees “for all necessary expenditures or losses incurred by the employee within the employee’s scope of employment and directly related to services performed for the employer.” 820 ILCS 115/9.5. The act defines “necessary expenditures” as “all reasonable expenditures or losses required of the employee in the discharge of employment duties and that inure to the primary benefit of the employer.”
To be reimbursed the employee shall submit a request for reimbursement, along with all appropriate supporting documentation within 30 days. This deadline can be extended pursuant to a written expense reimbursement policy. If the employee does not have supporting documentation, a signed statement regarding the expense will be sufficient.
Employees, however, will not be entitled to such reimbursements if: (1) the employer has an established written expense reimbursement policy and (2) the employee failed to comply. In addition, an expense need not be reimbursed unless it was authorized by the employer or was authorized pursuant to a written expense reimbursement policy. The employer may also put limits or caps on its reimbursement policy provided it is not de minimis or eliminates any reimbursements.
What Should Employers Be Doing? Work with your Illinois Employment Labor attorneys to do an annual review and check of your policies regarding expense reimbursements. It will be critical for all employers to have a policy so that there is adequate cost containment. Many employers will need to evaluate reimbursing its employees for cell phones, gas, and other expenditures they are required to incur for purposes of performing their job.
Nursing Mothers Must be Paid
As of August 21, 2018, nursing mothers in Illinois within one year after the child’s birth must be given “reasonable break time” to express milk and an employer “may not reduce an employee’s compensation for time used for the purpose of expressing milk or nursing a baby.” 820 ILCS 260/10.
What Should Employers Be Doing? Review your handbooks and policies to ensure new mothers understand that they are entitled to express milk as needed and that they are not being docked any pay for doing so.
Amendments to the Illinois Human Rights Act
On August 24, 2018, the Illinois Human Rights Act (“IHRA”) was amended in three meaningful ways. Some of the changes went into effective immediately, while others go into effect on January 1, 2019.
1. The amendments extended the deadline to file a charge of civil rights violations from 180 days to 300 days from the date of the alleged violation of the IHRA. The EEOC and IHRA deadline requirements are now the same in Illinois.
2. As of January 1, 2019, the Illinois Human Rights Commission composition will change from 13 part-time members to 7 full time members. This is expected to expedite matters before the Commission and reduce the number of cases pending before the Commission.
3. The Illinois Department of Human Rights (“IDHR”) is required within 10 days of a new charge, to notify the complainant that they have the right to opt-out of the investigation process and immediately receive the right to file a suit in circuit court. Once granted by the IDHR, the complaint must file suit within 90 days in circuit court.
What Should Employers Be Doing? Employers should expect a steady increase in claims filed before the IDHR. Previously, if an employee filed at the EEOC after 180 days it was not concurrently filed at the IDHR. So long as it is timely filed before the EEOC it will also be timely filed before the IDHR. Additionally, charges that are dismissed quickly at the EEOC may still be pursued at the IDHR that would have otherwise never been refiled.
The opt-out procedures will lead to aggressive plaintiff attorneys avoiding the investigation process entirely and filing suit as quickly as possible, increasing costs and the burden to defend these claims. Employers should continue to work closely with counsel to evaluate all terminations and be prepared to defend any claims that may get filed quickly in state court.
Levin Ginsburg has been working with employers for approximately 40 years to help them protect their businesses. If you have any employment or other business related issues, please contact us at 312-368-0100 or email Walker Lawrence at firstname.lastname@example.org
John, Alexandria, Mary, Martin, and Yvette, formed the Jammy Sleepwear Company over thirty-five (35) years ago. They were equal partners and formed a corporation. On the advice of their attorneys, the entered into a shareholders’ agreement that contained buy-sell provisions. This type of agreement is sometimes referred to as a “buy-sell agreement”.
Their buy-sell agreement contained various provisions, including under what circumstances a departing shareholder’s shares would be purchased, what the purchase price of those shares would be, and the terms of payment. Since the business was in its infancy, they agreed it would be valued at its “book value”, meaning that the value of the assets on its financial statements, less all obligations, would be the business’s value. There was no adjustment for good will or other intangible assets. Also, the increase in value of any assets would not be taken into consideration. The purchase price to a departing shareholder was to be paid in twelve (12) months, in equal monthly payments. The business was required to purchase a departing shareholders shares.
Since they formed the business in 1980, they acquired other businesses and purchased real estate through a separate LLC. They did not think to have a buy-sell for the LLC.
John has announced he would like to retire, but he has objected to the purchase price as being “unfairly” low. He has advised the other owners that he will keep his interest in the real estate, since it will provide him with a “good stipend” during his retirement. Shortly thereafter, Mary announced her retirement.
The remaining owners are concerned that the business will not be able to support payments to John and to Mary. Also, the remaining owners would prefer that John and Mary also sell their interests in the LLC.
Unfortunately, the shareholders (and LLC members) did not regularly review their buy-sell agreement. As the value of the business grew, the amount of the payments increased and would put a strain on the cash flow of the business. If more than one owner were to retire, it would cause a bigger strain. Either the business would have to borrow money, the owners would have to make capital infusions, new investors would be needed, or the business would need to be sold.
Some buy-sell agreements address these types of situations, by limiting the amounts that must be paid out to departing owners on an annual basis. For example, the payments cannot exceed a specific dollar amount or a percentage of gross profits. Also, when the owners buy real estate to be used by the business, they might consider including the real estate as a part of the buy-sell process.
Buy-sell agreements should be reviewed periodically to ensure they continue to meet the needs of the business and its owners. Levin Ginsburg has been advising business owners regarding legal aspects of their businesses, including buy-sell agreements for almost forty years.
Please contact us with any questions you have regarding your business (including any buy-sell issues) at 312-368-0100 or Morris Saunders at email@example.com.