Fall 2007
Anti-Fraternization Policies
In the modern office, sexual harassment is a real concern for employers and employees alike. Employers risk being vicariously liable for their employees' actions and in the event that one of its employees acts inappropriately, the employer may find itself as a defendant in a sexual harassment case. As a result, many employers have enacted anti-fraternization policies, so as to be able to insulate themselves from possible liability. These policies are designed to limit and restrict office romances, and they range anywhere from limiting simple fraternization to supervisor/subordinate dating restrictions.
Most employees of private sector companies are at-will employees and can be terminated for any reason so long as the termination does not violate a clear mandate of public policy. In most cases, employees who are disciplined in a fair manner for violating a company's anti-fraternization policy will have no legal recourse, because employers face a risk of vicarious liability for their employees' misconduct and need to position themselves to best avoid that risk. Conversely, government employers must be aware that these types of policies may violate their employees' constitutional right to freedom of association.
Companies thinking of enacting these types of policies need to be sure to avoid potential litigation by consistently and fairly enforcing the policy and not unnecessarily intruding upon employee privacy. Furthermore, employers must be sure to give their employees sufficient notice of the new restrictions and thoroughly describe the consequences if the policy is violated. While shielding the company from potential liability may seem to be reason enough to enact this type of ban, before doing so, employers must consider whether there will be any drawbacks to the policy. For example, will they be able to enforce the policy against highly-valued employees and ultimately treat all employees the same regarding the policy?
Finally, a company's policy may limit its employees' rights to fraternize socially, but may not restrict their right to organize. Doing so would intrude on workers' rights under federal labor law. As a result, policies must be carefully drafted so as to avoid litigation in this regard.
Non-Attorney Representation of Employers Permitted at UC Hearings
The Pennsylvania Supreme Court recently ruled in Harkness v. Unemployment Compensation Board of Review that non-attorneys can represent employers at Unemployment Compensation (UC) hearings. In an opinion authored by Chief Justice Cappy, the Court upheld such representation because it does not constitute the practice of law and is provided for in the Unemployment Compensation Law.
According to the Court, representation of an employer at a UC hearing entails little advising about legal rights and requires minimal legal knowledge. During the proceedings, the representative of an employer acts more as a facilitator, to assist the UC Referee in regard to fact finding, than an interpreter of the law. The Court also considered the important public function that non-attorneys fulfill in maintaining a UC system that is quick, simple and efficient.
The Court also referenced the Unemployment Compensation Law to support its holding, referencing long-standing statutory and regulatory provisions that refer to both claimant and employer non-attorney representation. Furthermore, in response to an earlier Commonwealth Court decision that employers must be represented by attorneys at UC hearings, the General Assembly enacted a new section of the Unemployment Compensation Law, which specifically provides that all parties can be represented by attorneys or non-attorneys. The Supreme Court's determination that such representation does not constitute the practice pf law serves to confirm the legality of this explicit provision.
Succession Planning for the Closely Held Business - Part II
In the previous issue of this newsletter, we discussed the use of buy-sell agreements as part of the business succession planning. The second article will discuss the value of life insurance as a funding mechanism for buy-sell agreements.
Funding can be the key to carrying out the provisions of a buy-sell agreement. A common solution is life insurance purchased on the lives of the key stakeholders. For redemption agreements, the corporation purchases the policy and pays the premiums. With cross-purchase agreements, the shareholders must purchase policies on each other. This can get quite complicated for corporations with many shareholders. For example, if a corporation has six shareholders, 30 insurance policies are needed. The number of required policies is computed using the following formula: NP=n5 - n, where An@ is the number of shareholders (30 = 6 x 6 - 6). If a stock redemption agreement is used, the company purchases one policy on the life of each shareholder, greatly reducing insurance costs and simplifying implementation of the agreement. To ensure that adequate funds will be available when needed, life insurance policies must be renewed periodically as shareholders' interests increase.
There are at least two techniques for structuring a cross-purchase agreement with multiple owners so as to avoid the need for multiple policies on each owner's life. You might wonder why, for example, each of six shareholders cannot simply co-own policies on each other. For instance, shareholders A, B, C, D, and E could co-own a policy on the life of shareholder F. While co-ownership may solve the need for multiple insurance policies, co-ownership arguably creates a transfer-for-value problem because at the death of an owner, the remaining owners' interests in each co-owned policy are shifted. Accordingly, when F dies, F's estate arguably will make a transfer for value by transferring the portion of the policy on A's life to B, C, D, and E. The two feasible options are (1) establishing an LLC or partnership to own one policy on the life of each of the six shareholders or (2) appointing an escrow agent or trustee to own policies on the lives of each of the six shareholders.
The Internal Revenue Code does not allow a deduction for life insurance premiums paid by a corporation for policies on the lives of the officers and employees, but the premiums will not be considered income to the shareholders even if the shareholders are parties to the buy-sell agreement. When the covered shareholder dies and the corporation receives the insurance proceeds, the proceeds are not included in the corporation's gross income, but should be added to the corporation's earnings and profits for determining dividends to be distributed.
Insurance premiums paid by individual shareholders do not qualify for an income tax deduction, but the proceeds, when received, will not be included in the shareholder's income.
Identity Theft: Everyone's Business
According to the Federal Trade Commission, annually, between 9 and 10 million Americans have their identities stolen in some form. Theft commonly includes the use of an existing credit card, bank or other account.
A recent private study estimates that each year, about 3 million Americans are the victims of the worst kind of identity theft: new account fraud. With new account fraud, stolen names, social security numbers, dates of birth and other personal data are used to open new lines of credit, flip real estate or otherwise turn a profit in a victim's name. This type of theft is usually more time consuming and costly to repair than fraudulent use of existing accounts.
For example, a middle-aged Chicago woman who does not own a computer or have a cell phone was forced to make hundreds of phone calls and complete reams of paperwork in an effort to set things right after she found herself deeply in debt to Sprint PCS and delinquent on car payments for a $23,000 Pontiac Grand Am. She neither used the Sprint services, nor owned the car in question.
The bank notice concerning the delinquent care payment was particularly galling given the fact the victim had spent years taking the bus to work, paying her bills on time and otherwise trying to build up her credit in hopes that she could someday buy a car.
In this instance, the personal information probably came from a rogue salesman at the auto dealership. Most victims, however, never learn who stole their identities. Of those who do, about half say the thief was a family member, friend, neighbor or an in-house employee.
We all need to take basic precautions, such as shredding documents that contain any personal information and canceling unnecessary credit cards. Social Security numbers or bank account numbers should not be given to strangers over the telephone or the internet; mail should not be left in unlocked box.
But increasingly, consumers have an arsenal to use in the war against identity theft. Under the federal Fair and Accurate Credit Transaction (FACT) Act, all consumers are entitled to one free copy of their credit report annually from three major credit bureaus: Equifax, Experian and Transunion. (See annualcreditreport.com, where you can download your free reports.) The credit reports should be applied for at least once a year and checked for accuracy. Under the federal Fair Credit Reporting Act, you have a right to request the correction of an inaccurate information. If you find a mistake, you should at once contact both the credit bureau and the institution that was the source of the error.
Under the FACT Law, a consumer can also place an alert on his/her credit report if there is a reason to believe that someone has stolen her social security number, credit card, or other personal information. With a fraud alert in place, lenders (banks, brokers and retailers) must do additional investigation before granting new credit in the consumer's name.
Also, "security freeze laws" allow consumers to block access to their credit reports unless permission to review such reports is specifically given to lenders. Public support for such legislation is growing as a result of reports of data breaches at banks, retail stores and companies that process consumer credit cards.
Freeze laws enable consumers to prevent banks or credit agencies from issuing new accounts in their names. At least seventeen states have passed such laws. (Pennsylvania joined the ranks last December.) Some of the laws apply when lenders uncover or receive notification of data breach. (Most states do not require lenders to notify consumers if their identities have been compromised.) Others, like Pennsylvania, require credit bureaus to implement and lift freezes, either upon request of the consumer, or until a date based upon the date that the security freezes was put in place.
Bottom line: You can't completely prevent identity theft but there are many steps you can take to reduce the risk. The FTC publication, Take Charge: Fighting Back Against Identity Theft, is an excellent guide. It offers sensible recommendations on how to identify theft when it has occurred, what immediate steps to take, and how to resolve specific problems.
While consumers must take care to safeguard personal information, so should businesses. Statistically, rogue employees (e.g. at a doctor's office or collection agency) are far more likely to be the cause of theft than hackers infiltrating some database.
Many financial service companies have introduced safeguards to their own web sites in an attempt to reduce fraud. For example, Bank of America requires customers to click on a photo, specifically assigned to an individual account, in addition to punching in a password.
Next time, we'll focus on other steps business can take to protect personal information. In the meantime, keep shredding and be vigilant.
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