BizLawBuz …. The Power of Know

This week’s featured topic is provided courtesy of Wright Penning & Beamer client and friend Tom Buck. Thanks, Tom, for sharing this insightful piece.

Eight Practices to Protect Your Corporate Cash

by JT (Tom) Buck
an old entrepreneur

Recently, a very good friend had the unfortunate situation of an employee embezzling funds from his company. This was not sneaking an extra $20 onto an expense report. It was a concerted effort over a long period of time to steal and hide the misappropriation of large sums of money.

The employee had literally stolen several thousand dollars per month over several years. The embezzlement was hidden in legitimate looking, duplicate vendor invoices, checks which were signed by an authorized signer; which then were altered on the payee line. The volume of checks and invoices handled on a monthly basis obscured the false transactions. My friend was shocked at the behavior of this trusted employee. He was fortunate that insurance provided a partial recovery and that the company’s long-term prospects for success were not harmed once this was discovered. However, the loss, the effort for recovery, and the damage done to their culture of trust was extreme.

My friend is a very smart and trusting man. This led to the success of the thief for many years, yet, following this experience, several financial procedures in his company were changed to prevent a future occurrence of this type of theft. This story and the following practices were gathered from a review of best practices as recommended by two leading CPAs in Southeast Michigan and are shared for the benefit of other business owners. If implemented, these practices will greatly reduce the probability of your company having a similar experience.

Practice Number 1 – Disbursement Review
These best practices start with a complete review of all funds going out of the company. This particular practice would have, most likely, prevented the embezzlement at my friend’s company. An owner must review every disbursement item on the bank statement, comparing each item to the related invoices or originating transaction, every month.

Practice Number 2 – Review Endorsements on Checks
For every check written, read the endorsements on the back to ensure they are going where intended. Some banks do not return the paper checks in efforts to become more paperless. This may require viewing the backs of checks on-line.

Practice Number 3 – Review Cash Transfers
Some of your transactions may be through automatic transfers or pre-authorized withdrawals. This practice requires a specific review, every month, of all other transactions involving cash transfers including but not limited to: ACH, Tax, 401k transactions and other payments. Make sure these amounts match the expected payments and originating documents.

Practice Number 4 – Enter all Debits and Credits into the Accounting System
Many times smaller credits or debits can go unnoticed in the busy activity of a month. These can be in the form of a refund on a vendor invoice, or a discount for early payment, or perhaps even a small expense item paid for out of petty cash. These transactions are often not tracked well in the accounting system because they are small or seem unimportant. These debit memos and credit memos must be entered into the accounting system to have accurate accounting and to prevent the possibility of the funds they represent being misappropriated.

Practice Number 5 – Enter all Payables into Accounting
A bill, which arrives the first of the month and is due within the month, may be placed into the payments file and just entered into accounting as an expense opposite a cash payment. To track these fully, they should be entered as an expense opposite (increasing) the payable account, then cash opposite (decreasing) the payable account. Otherwise, payables records will be incomplete.

Practice Number 6 – Follow the Rules
Create a culture of following the financial rules. Contrary to a world where we want to see ‘out of the box’ thinking to improve our products, our services and our relationships with customers, the financial reporting and management arena is one where following the rules keeps bad things from happening. Any deviations from these particular rules should be well understood and documented.

Practice Number 7 – Background Investigations
Establishing the practice of performing background checks on employees who work with the accounting system, financial payments and financial receipts is a way to insure that the people handling these transactions do not have a history of malfeasance. As intrusive as this may feel, it is incumbent on owners, for the success of the enterprise to employ talent with the highest ethics for work in finance and accounting.

Practice Number 8 – Enforce Vacation Policy
The discovery of the malfeasance in my friend’s company occurred while the employee was on vacation and another employee was covering their responsibilities. This points out the wisdom of enforcing a minimum of a one-week vacation per year, with another employee stepping in, for those with financial responsibilities in the organization.

If these eight practices are followed, the likelihood of an employee escaping with corporate funds is greatly reduced. Owners often find having a personal focus on sales and operations to be of the greatest satisfaction as they apply their time and energy in their organization. While delegation of financial responsibilities seems prudent, regular time allocated to these practices will improve the results and security of the company’s resources. The embezzler from my friend’s company is serving time in jail as of the timing of this writing. While this prospective consequence deters most employees from stealing, without the above practices it is possible they could escape.

Thanks to Jim Bauters of UHY Advisors, Inc. in Southfield, Michigan, and to Kevin McKervey of Clayton McKervey, P. C. also of Southfield, Michigan, for their suggestions and contributions to the creation of this article. Thanks also to my friend for being willing to share a terrible experience to help others avoid the problem.

Dirk A. Beamer

Regularly, I have business clients tell me with confidence, “I don’t need to worry about hiring this new employee even though she has a non-compete with her former employer. Those agreements aren’t enforceable anyway.” Just as often, employers complain, “He can’t go to work for my competition! He has a non-compete agreement with me.” Who is right? At the risk of sounding like a lawyer, I have to say, “It depends.”

Covenants not to compete (non-compete agreements) are contractual arrangements in which one party (typically either an employee or a business seller) agrees that he will not engage in certain competitive activity to the detriment of the other party for some specified period of time. In some jurisdictions, like California, state law prohibits this type of agreement in the employment context. Other jurisdictions, including Michigan, expressly permit non-compete agreements by statute. However, even where they are permitted, these agreements are typically subject to certain “reasonableness” standards. The Michigan statute, for example, provides: “To the extent any such agreement or covenant is found to be unreasonable in any respect, a court may limit the agreement to render it reasonable in light of the circumstances in which it was made and specifically enforce the agreement as limited.”

In practice, this means that any given covenant not to compete is presumed to be enforceable but it is also subject to attack under a claim that it is not “reasonable.”

Because non-competes are legally permissible, employers should take advantage of the opportunity to protect their business interests by seeking reasonable non-compete commitments with their employees. To minimize the risk of a challenge, employers need to exercise restraint and craft restrictions – especially as to duration and geographic scope – as narrowly as possible. Additionally, employers should be leery of hiring an employee from a competitor if that employee previously signed a non-compete agreement with the competitor.

On the flip side, when an employer believes a former employee is violating her non-compete agreement, it must evaluate the cost of enforcement against the actual harm it expects to suffer. To gain any meaningful benefit, employers typically will need to file a lawsuit quickly and ask the court for some sort of preliminary injunctive relief. This means legal costs will be compressed and accelerated as attorneys ramp up for what is effectively a trial within a trial at the hearing for the preliminary injunction.

My advice? Take a cautious approach. If you are considering hiring a new employee who already has a non-compete agreement with her former employer, do not assume that the agreement won’t be enforced or that the former employer will not drag you into court to fight over it. If you are the former employer, and you wish to take action to enforce the agreement, you need to do a cost benefit analysis to ensure that the benefits of enforcement justify the cost of getting there. If you do not have non-compete agreements in place with your sales and management staff, you should. And if you do, conduct a full review to make sure they have in fact been signed and that they have been tailored narrowly to satisfy reasonableness requirements under the law.

Dirk A. Beamer

Determining Whether Your Business is Covered
Few pieces of federal employment legislation have proven more difficult to untangle and to administer than the Family and Medical Leave Act of 1993 (FMLA). At its core, the FMLA allows eligible employees to take as much as twelve weeks of unpaid leave to deal with their own or a family member’s medical needs with the assurance that their jobs will be held pending their return. That sounds simple enough, but administering FMLA leaves with your work force can be a real challenge. And if you run afoul of the FMLA’s requirements, your business can face a claim for back pay, future pay, liquidated damages (basically a penalty), mandatory interest and attorney fees. For all of these reasons, it is imperative that covered employers understand and comply with the FMLA.

Who is a Covered Employer?
An employer is covered by the FMLA if it has employed at least 50 employees for each work day of 20 or more workweeks in the current or prior calendar year. This includes all full or part-time employees on the payroll, including unpaid employees (e.g., someone out on an unpaid FMLA leave still counts toward the 50). It does not include employees who work outside of the United States or its territories.

Notice that the test is not whether the employer currently has 50 employees. It is based on the current or prior calendar year, and it is based on any twenty weeks in that year. The weeks need not be consecutive.

Joint Employers and Integrated Employers Beware!
More than once, I have had clients tell me they needn’t worry about the FMLA since they lease their employees from a Professional Employer Organization (PEO). In most of these instances, the business will be deemed a “joint employer” along with the PEO and will be equally responsible for assuring compliance with the FMLA.

Likewise, two or more businesses with closely entwined ownership or management may be deemed “Integrated Employers” whose workforces will be counted collectively to test the 50 employee FMLA threshold. According to the applicable federal regulations, courts will analyze the following factors to decide whether multiple employers are integrated under the FMLA: (1) common management; (2) the interrelationship between the companies; (3) whether control of labor relations is centralized; and (4) the degree of common ownership or financial control. Typically, courts will be especially influenced by common management and shared control of the labor force.

You Can’t Comply if You don’t Know Your Obligations
Though cumbersome, compliance with the FMLA can be managed effectively with proper attention and planning. The first step is determining whether your business is covered and conducting periodic checks for any change in its status. If you need help, please feel free to give us a call.

Dirk A. Beamer

On March 24, 2011, the Equal Employment Opportunity Commission (EEOC) published the much-anticipated final regulations regarding the Americans with Disabilities Act Amendments Act (ADAAA), which was signed into law by President Bush in September 2008, and took effect on January 1, 2009. These regulations significantly change the existing legal framework on disability law, and employers should be aware of how the regulations impact their obligations. A couple highlights of these new regulations and their impact are addressed below.

Impairment that “Substantially Limits” a “Major Life Activity”

The ADAAA defines “disability” as:

• A physical or mental impairment that substantially limits a major life activity;
• A record of such impairment; or
• Being regarded as having such an impairment.

The regulations now provide more guidance to assist in determining whether a “substantial limitation” exists. Employers should note that the regulations make it clear that the term “substantially limits” should be construed “broadly in favor of expansive coverage.” It is not intended as a “demanding standard.”

Furthermore, the term “major life activity” should not be interpreted strictly so that it unintentionally creates a demanding standard for determining existence of a disability. “Major life activities” include major bodily functions such as hemic, lymphatic, musculoskeletal, special sense organs and skin, and cardiovascular functions, to name a few. The activity need not be one that is “of central importance to daily life.” Consequently, many more activities may be covered by the ADAAA.

Examples of Impairments
Impairments can be permanent or long-term, or episodic and short-term, and under the regulations and rules of construction, there are certain impairments that will always be considered disabilities: including, for example, diabetes, epilepsy, major depressive disorder, autism, HIV infection, obsessive compulsive disorder, bipolar disorder, cancer, and post-traumatic stress disorder.

Conclusion
At the end of the day, employers should focus on how they might reasonably accommodate an employee’s impairment, rather than on determining whether a disability (or substantial limitation) exists. While the regulations are useful in clarifying the focus and meaning of the ADAAA, they also may increase employers’ exposure to liability if reasonable accommodation for an impairment is not afforded to the employee. The analysis will center on whether the employer met its obligations and whether discrimination occurred, and no longer on the question of whether the individual is substantially limited in a major life activity.

For additional questions regarding the ADAAA and how it might apply to your business, please contact Wright Penning & Beamer.

Julie P. Cotant

With all the buzz about health care reform, few are aware of a provision within the Patient Protection and Affordable Care Act (”PPACA”) that requires an employer to provide “reasonable break time for an employee to express breast milk for her nursing child for 1 year after the child’s birth each time such employee has a need to express the milk.” In addition, employers must provide “a place, other than a bathroom, that is shielded from view and free from intrusion from coworkers and the public, which may be used by [a nursing mother.]”

I’m an employer – how do I interpret this provision?
Nursing employees should be given a “reasonable” amount of break time as frequently as needed, requiring employers to be flexible. Unfortunately, there is not much guidance as to what is reasonable, and the frequency and length of time will likely vary between individuals. One source says nursing mothers need roughly one half-hour break for every four hours worked.

As mentioned above, a bathroom is not sufficient even if it is private, but an employer is not required to provide a dedicated lactation center. Temporary spaces are acceptable, as long as the space is functional for the nursing mother’s use, shielded from view, and free from any intrusion from coworkers and the public.

You do not need to compensate the mothers for breaks taken under this provision, although employers must ensure that the employee is completely relieved from duty during the break in order to avoid paying compensation during that time. Please note, if you are already providing compensated breaks to other employees, nursing mothers must be compensated in the same way as the other employees.

Does this apply to my company?
If you have fewer than 50 employees, this provision may not apply if compliance would impose an undue hardship. Undue hardship is determined by looking at the difficulty or expense of compliance in comparison to size, financial resources, nature, and structure of the employer’s business.

Please contact Wright Penning & Beamer for any additional questions related to PPACA and how it applies to your business.

Julie Pfitzenmaier

Avoid These Filters While Recruiting Employees on Social Media Sites

I recently received a phone call from a corporate client that was preparing to launch a recruiting campaign with a prominent social media site. The client was seeking white-collar professionals with sufficient years of experience to demonstrate competency in their field. Based on the qualifiers selected by the client as the “advertiser,” its banner ad would appear on the home page of site users whose personal information matched the targeted criteria.

Hazard of targeted demographic filters
To try to capture the “target” audience with the requisite years of experience, the client tentatively choose the “between ages 30 and 40″ filter offered as part of the ad application. Fortunately, the individuals responsible for placing the ad were well versed in employment law, and before pulling the trigger, contacted me to discuss that particular filter. As we talked about it, we decided that the filter could have the unintended and unnecessary effect of opening a claim for age discrimination if someone over forty applied for, but did not receive, the job. While the age “30 to 40″ filter would not be published to the applicants, I was concerned that it could be discovered in the course of litigation if someone was inclined to sue based on alleged age discrimination. The client eliminated the filter and tailored one based explicitly on the minimum number of years required for the job.

Do not lose sight of legal parameters
As online and social media advertising grow, so too will grow the data-trail of information plaintiff lawyers will try to uncover in the course of litigation. The same questions that you would not ask in an interview should not be asked, or used as filters, in an online recruiting campaign. As you take advantage of these new recruiting opportunities, do not lose sight of the legal parameters in which you conduct them.

Dirk A. Beamer

In this changing economic climate, employers are seeking new and creative ways to hire or classify workers, hoping to avoid some of the mandatory benefits imposed by the Fair Labor Standards Act (FLSA). Under the FLSA, employers are required to pay minimum wage, overtime, and maintain certain records. Employers are therefore looking to independent contractors, subcontractors, temp agencies, or labeling the workers “independent contractor,” “tenant,” or “subcontractor” or “temporary labor provider” to avoid the label “employee.” Employer classification, contract language, or the manner in which a worker was hired does not hold much weight when determining if a worker is an employee for purposes of the FLSA. As a result, employers need to carefully consider the “economic realities” of the relationship between the employer and the worker to determine if FLSA applies.

Six factors of the “Economic Realities” test
The “economic realities” test is used in courts across the country to determine if a worker is an employee under the FLSA. The test is composed of six factors. Each factor is important, and no factor weighs more heavily than another.

1. How permanent is the relationship between the parties?
2. What degree of skill is required for rendering the services?
3. What investment does the worker make in equipment or materials needed to perform the task?
4. What is the worker’s opportunity for profit or loss? This factor depends on the worker’s skill.
5. What is the degree of the alleged employer’s right to control the manner in which the work is performed?
6. Is the service being performed an integral part of the alleged employer’s business?

Business owners should take note that the FLSA test differs dramatically from tests commonly used in other aspects of their business, such as for tax purposes, and that the “economic realities” test is the only one that applies to the FLSA.

For any questions regarding applicability of the FLSA to your business, and for assistance analyzing the status of your workers under the “economic realities” test, please contact an attorney at Wright Penning & Beamer.

Julie Pfitzenmaier

Increasingly, employers are providing employees with mobile communication devices such as smart phones and laptops. Most employers permit personal use of those devices, yet they tend to lack clear-cut policies to protect themselves from liability stemming from that personal use.

Perhaps the most serious risk to employers is invasion of privacy claims arising out of an employer accessing an employee’s emails or text messages on a company-issued phone or computer. Less serious, but probably more widespread, is the risk for unexpected overtime claims arising out of after-hours use of mobile devices.

Company policies should clearly state that the employer retains ownership of all company-issued devices, and that, in the course of accessing communications as needed for business purposes, personal content may necessarily be viewed.

In addition to establishing that employees should have no expectation of privacy with regard to mobile device content, employer policies should identify and prohibit harmful or illegal activities in order to better protect employers from liability relating to misuse of phones and other devices.

Similarly, well-crafted policies and practices can help an employer avoid unexpected overtime liability. For instance, the business use of mobile devices by nonexempt employees should be restricted wherever possible. Also, nonexempt employees should be required to log and report all work performed on their mobile devices outside of business hours.

Mobile communication devices can be extremely valuable business tools. Well-crafted policies and practices can help to keep them that way!

Lee Flaherty

My dad was a lifetime smoker. Sadly, he died with cancer at age 71. Although I repeatedly urged him to quit, I must admit I felt some sympathy for him as social attitudes toward smoking evolved, and he found himself, increasingly, smoking outside and alone. Today, it is unlawful to smoke in most public buildings in many states including Michigan and Ohio. Employers who have employees who smoke struggle with work rules that are considered “fair” by smokers and non-smokers alike. At the heart of the debate is the “smoke break.” Must employers accommodate those five minute breaks throughout the day when diehard smokers huddle in the cold outside the office door? Must they pay for this time away from the workstation?

Generally speaking, employers are not required to provide work breaks of any specific length or frequency. So long as the employer compensates its employees for any hours worked in excess of 40 hours in a week, it has considerable latitude to set the workday schedule. In theory, an employer could schedule a twelve hour workday without even a lunch or bathroom break. Practically speaking, that employer will have a hard time retaining employees. So, in general, an employer is not required to offer breaks to accommodate smoking.

But to the extent the employer does provide breaks, it generally cannot dock pay for those breaks that are less than 20 minutes in duration. If people are permitted to walk to the lavatory or the water cooler or outside for a smoke, the employer cannot turn around and dock the employee for this lost productivity. Although some exceptions may apply, the general rule of thumb to be remembered is this: Permitted breaks of 20 minutes or less are with pay. If a break is to be without pay, it should be greater than 20 minutes, and it is imperative that the employee is completely relieved of duties during the unpaid break.

Dirk A. Beamer

Many of us in the Midwest are bracing for what is expected to be the worst snow storm of the season tonight and tomorrow. Many workplaces (including our office in Farmington Hills) will be closed tomorrow to avoid the safety risks of traveling through the ice and snow. If you close early, or for a full day, how do you handle payroll?

Generally speaking, “non-exempt” employees (those people who are eligible for overtime) may be sent home early, or told not to report the following day, without pay. A few states have rules that if an employee travels to work, he or she is entitled to a certain base amount of compensation, but Michigan and Ohio are not among them. Therefore, if you close early today or tomorrow, you do not need to pay non-exempt employees for the time off.

On the other hand, you do need to pay your “exempt” employees, which will include many salaried employees. The only reliable exception to the rule is if you are closed an entire week at a time, you need not pay for that week. While the forecast is bad, it should not have us shut down for a week, so this rule will not likely apply. You do have one other option with “exempt” employees. You can require that they use available paid time off to cover the closing. But if they don’t have sufficient time off available, you still must pay them the difference.

Stay warm, stay safe, and make sure you stay clear of any wage and hour violations.

Dirk A, Beamer