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Employment Law Update: New Approach to Determining Whether Employer Policies Violate the NLRA

The National Labor Relations Act (“NLRA”) serves to protect the rights of employees and employers while restricting certain management practices that may harm workers. The National Labor Relations Board (“NLRB”) is the federal agency that enforces the NLRA.

Section 7 of the NLRA protects an employee’s right to engage in concerted activity, organize, and bargain collectively. Section 8 prohibits employers from adopting workplace policies that interfere with, restrain, or coerce employees in their exercise of these Section 7 rights. Until recently, the NLRB analyzed employer policies under a “reasonable construction” standard created in Lutheran Heritage Village-Livonia, which asked whether employees could “reasonably construe” that an employer policy prohibited a Section 7 right (known as the Lutheran Heritage standard). This standard was very unclear and often led to arbitrary results, leaving much confusion about what rules were actually prohibited under the NLRA.

Recently, in The Boeing Company, the NLRB abandoned this approach and adopted a new standard, allowing the NLRB to consider unique characteristics of a particular situation, rather than the previous “one-size-fits-all” analysis. 365 NLRB No. 154 (Dec. 14, 2017). Under the new rule, the NLRB will first determine whether a facially neutral policy, when reasonably interpreted, could prohibit or interfere with the exercise of an NLRA right. If not, the rule is lawful, without consideration of business justifications.

However, if the NLRB finds that a policy may interfere with Section 7 rights, the NLRB will now analyze two factors: (1) the nature and extent of the potential impact on NLRA rights; and (2) legitimate justifications associated with the requirements. In making this evaluation, the NLRB will work to “strike the proper balance” between “asserted business justifications and the invasion of employee rights” under the NLRA.

After the NLRB analyzes a policy, it will fall into one of three categories:

Category 1 includes rules the NLRB designates as lawful to maintain, either because they aren’t interpreted to interfere with an employee’s NLRA rights or because any potential impact on these employee rights are outweighed by employer justifications for the rule. (i.e. rules that are lawful, because any impact on an NLRA right is outweighed by the employer’s reasoning for the rule).
Category 2 includes rules that warrant individualized scrutiny to determine if the policy would interfere with an employee’s NLRA rights, and if so, whether the potential impact on these rights is outweighed by legitimate employer justifications.
Category 3 includes rules the NLRB determines are unlawful to maintain because they prohibit or limit NLRA protected conduct and the potential negative impact on employees’ NLRA rights is not outweighed by employer justifications for the rule. (i.e. rules that are unlawful, because the impact on an NLRA right outweighs any employer justification for the rule)

The NLRB explained that in making its determination, it may differentiate among different types of NLRA protected rights, as well as substantial, rather than peripheral, employer justifications. The NLRB also noted that it may apply distinctions between different industries and work settings, as well as consider particular events that may be relevant to the purposes served by a specific policy.

The NLRB will weigh a policy’s potential impact on protected NLRA activity against the employer’s legitimate business justifications for the policy. If the policy’s justifications outweigh the potential impact of employee rights, the rule is lawful. If employer justifications don’t outweigh the impact on employee rights, the policy is unlawful.

This new approach is more favorable to employers since it offers greater consideration of employer justifications for rules. Additionally, employers and employees will have more confidence about the validity of policies, since the new standard provides greater clarity and certainty regarding whether, and to what extent, different types of rules are lawful.

Even though the NLRB’s new approach offers more security to employers, it is still important for employers to review their employee handbooks and other workplace policies to ensure they all comply with the NLRA. Attorneys at General Counsel PC are specialized in labor and employment law and have experience working with business owners and individuals across Virginia, specifically in Fairfax County, Arlington, Loudoun County, and Prince William. Our attorneys will stay informed of subsequent NLRB decisions offering additional guidance on the new approach, to ensure we can provide clients with the most up to date information. Call General Counsel PC at 703-556-0411 today to see how we can help you.

Employment Law Update: Supreme Court Says Arbitration Requirements in Employment Agreements are Enforceable

A recent U.S. Supreme Court case, Epic Systems Corporation v. Lewis upheld employers’ use of class-action waivers in arbitration agreements. No. 16-285, 2018 WL 2292444, at *1 (U.S. May 21, 2018). Based on this ruling, employees that have signed such agreements are no longer able to join together to sue employers and instead must use arbitration to individually resolve any issues. This decision will likely make it harder for employees to sue employers now that collective bargaining is off the table. Class actions offered employees a chance to seek damages from employers when individual lawsuits were too costly, potential damages were too low, or when employees feared retaliation if they sued employers individually.

Epic Systems Corp. consolidated three separate cases involving three different employers: Epic Systems, Ernst & Young, and Murphy Oil. In each of these cases, an employer and employee entered into a contract providing for individualized arbitration proceedings to resolve employment disputes between the parties. However, each employee later sought to litigate Fair Labor Standards Act and related state law claims through class or collective actions in federal court.

The Arbitration Act requires courts to enforce agreements to arbitrate, including the terms of arbitration agreed to by the parties. The Arbitration Act also includes a savings clause, which allows courts to refuse to enforce arbitration agreements “upon such grounds as exist at law or in equity for the revocation of any contract.” The employees here argued that the savings clause applied to the waivers prohibiting class actions, creating a “ground” upon which the court may refuse to enforce the arbitration agreements. The employees relied on the National Labor Relations Board’s interpretation that the National Labor Relations Act overrides the Arbitration Act. However, the court found that the savings clause was not applicable to the employees’ arbitration agreements.

The Supreme Court noted where two acts discuss the same issue “Congress will specifically address preexisting law before suspending the law’s normal operations in a later statute.” The court stressed that “the absence of any specific statutory discussion of arbitration or class actions is an important and telling clue that Congress has not displaced the Arbitration Act.” The court summed up by stating: “Congress has instructed that arbitration agreements like those before us must be enforced as written. While Congress is of course always free to amend this judgment, we see nothing suggesting it did so in the NLRA.”

The court’s finding that collective bargaining law does not supersede the federal law that established the arbitration process and that the class-action waivers in employment contracts are valid, may lead more employers to include such provisions in their employment agreements. Employers are likely to see the court’s decision as a big win, while employees may second-guess decisions to initiate actions against employers, knowing arbitration is the only option.

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Whether you’re an employer or employee wondering how this decision might affect you, attorneys at General Counsel PC can help. Our attorneys are specialized in labor and employment law and have experience working with business owners and individuals across Virginia, specifically in Fairfax County, Arlington, Loudoun County, and Prince William. Call General Counsel PC at 703-556-0411 today to see how we can help you.

What Should I Consider During a Business Divorce?

Business relationships fail for many different reasons: business partners may have long-term disagreements, a change in leadership, or simply a desire to go in different directions. Even successful businesses may have to deal with business divorce issues if business partners decide that the benefits of continuing their business relationship are outweighed by the costs accompanying their continued co-ownership of the business. Breakups are never easy, and business relationships are no different, but there are some things business owners can do to help prepare themselves for the eventual divorce.

Plan Ahead – Have a Written Agreement at Formation

Even if business partners don’t ultimately decide to part ways, some type of conflict is almost inevitable. For this reason, it is important to plan ahead and have some type of operating agreement or corporate shareholders agreement in place at the start of the business relationship to help guide the resolution of conflicts later on. A well-drafted agreement at the time of business formation can help to prevent a deadlock from occurring over disagreements about how to end the relationship.

Important provisions to consider including in these formation agreements include buy-sell agreements, provisions to forestall squeeze-outs, triggers for dividends, and non-compete agreements. A buy-sell agreement requires the company or remaining majority owners to purchase the minority’s stock in the case of agreed upon events. To ensure that a deadlock isn’t reached, an agreement can include a “shotgun” provision, requiring a mandatory sale in the case of disagreement and deadlock. While this ensures that the business isn’t left in limbo while business partners disagree, it also means that in the case of a disagreement over how to part ways, neither party is able to retain the business. Another option is including a provision that gives all shareholders the right to offer a specific price per share for the other shareholder’s shares. The other shareholder then has the option of accepting the offer or buying the offering shareholder’s shares at the agreed-upon price.

What Are My Options During a Business Divorce?

Many business disputes arise when there is a deadlock between the owners and the owners’ inability to agree results in the business being unable to make business decisions. There are a few different ways to deal with such deadlocks and a resulting business divorce. One option is to appoint a provisional director which serves on a corporation’s board of directors until a deadlock is broken. Another option is a buyout, where majority owners purchase minority owner’s remaining stock. Business owners can also consider complete dissolution of the company, selling all of the company’s assets and parting ways. Additionally, business partners may want to use mediation to allow a neutral third party to help resolve business disputes. If none of these alternatives are able to generate a resolution, parties can seek legal remedies in court, but that option is often costly, time-consuming, and not usually preferable.

Remember Your Fiduciary Duties

Even if it’s certain that a business will soon be dissolved, business owners must use caution to ensure they do not take any actions against the company in bad faith. Until the time when a dissolution is official, business owners may owe a fiduciary duty to the company, as well as to each other. If one co-owner plans on leaving the business to start his own competing business, he may be in violation of non-competition or non-solicitation agreements. The specific duties owed to the company and other business owners vary depending on the type of business entity involved.

For example, under the Virginia Uniform Partnership Act, partners owe the partnership and other partners a duty of loyalty and care. Under the Virginia Code, partners also must act in accordance with the obligation of good faith and fair dealing. These duties do not end until the partnership has dissolved, so partners must refrain from competing with the partnership and other partners before the dissolution is complete.

Additionally, business owners using company resources for their new businesses or asking clients to leave the business and instead go to the new business may face liability for tortious interference with contract expectancy, civil and statutory conspiracy, as well as other claims. A claim for statutory business conspiracy under the Virginia Code may be made if another owner suffers injury to his “reputation, trade, business or profession.” A claim for tortious interference with contract expectancy may be successful if a co-owner intentionally interferes with a business relationship or contract expectancy of the company’s and the interference results in a breach or termination of the relationship or expectancy.

Call General Counsel PC Today

Disengaging from a business relationship is a complicated matter. Having to decide what the best course of action is and not knowing what you can and can’t do just adds to an already stressful and difficult situation. Seeking help from experienced professionals who can help guide you throughout the process will help lessen the burden and make the process run more smoothly. Our attorneys are specialized in business law and have experience working with business owners across Virginia, specifically in Fairfax County, Arlington, Loudoun County, and Prince William County. Call General Counsel P.C. at 703-556-0411 today to see how we can help you.

Employment Law Update: New Test for Determining if California Workers are Employees or Independent Contractors

Summary: California Supreme Court has established a new standard that makes it much more likely that workers will be W-2 Employees – not 1099 Contactors.

The distinction between a 1099 independent contractor and a W-2 employee is an important one, as this classification affects both federal and state tax issues, and it is important that business owners correctly determine the employment status of workers. Misclassifications can result in liability of the company for missing employment taxes, interest, and penalties and entitlement of the employee to past benefits.

Until recently, the test for determining whether a worker is an independent contractor or an employee could be complicated because the test was unclear and there were a number of factors to be considered. However, recently, the Supreme Court of California helped answer the question of whether workers should be classified as employees or as independent contractors for purposes of California wage orders. Dynamex Operations W., Inc. v. Superior Court, 4 Cal. 5th 903, 416 P.3d 1, 5 (2018). The court decided to utilize a new test to make this determination more clear. Now, in California, a worker is an independent contractor only if: (1) the worker is free from the control and direction of the hirer in connection with the performance of the work; (2) the worker performs work that is outside the usual course of the hiring entity’s business; and (3) the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

This test adopts a much more expansive classification of “employee.” Under the first “control and direction” element, a business doesn’t need to control all details of the work in order for the worker to be an employee. The second “outside the usual course of business” element is likely to pull in many workers that were previously categorized as independent contractors. This element will include “individuals who can reasonably be viewed as working in the hiring entity’s business.” For example, if a clothing manufacturing company hires seamstresses to make clothing from home or a bakery hires cake decorators to regularly work on custom cakes, those workers are working in the same business as the hiring company, and are thus, employees. To be an independent contractor the scenario would have to more closely resemble that of a retail store hiring an outside plumber to repair a leak on the premises. Since there, the plumber’s business of plumbing is clearly much different than the hiring business’s retail business, the worker may properly be considered an independent contractor. Lastly, the “customarily engaged” element asks if the worker has independently made the decision to go into business for himself, taking the steps of establishing and promoting an independent business, rather than simply being designated an independent contractor by the hiring business.

If you are unsure how this update affects the employment status of individuals performing services for your business, call General Counsel PC at 703-556-0411 today and our attorneys can help you make that determination.

What is the Difference Between a 1099 Independent Contractor and a W-2 Employee?

The distinction between a 1099 independent contractor and a W-2 employee is an important one, as this classification affects federal income tax, social security and Medicare taxes, as well as impacts eligibility for Medicare benefits. It is important that business owners correctly determine whether individuals are employees or self-employed. If a company misclassifies a worker as an independent contractor that is actually an employee, the company could be liable for missing employment taxes, interest, and penalties. Additionally, the employee may be entitled to past benefits.

Business owners generally must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment taxes on wages paid to an employee. An employer also must provide a Form W-2 to an employee. No similar withholdings or taxes are required for payments to independent contractors. Instead, an independent contractor is required to pay his own income and self-employment taxes and may be able to deduct business expenses. The company may be required to provide an independent contractor a Form 1099-MISC.

How Do I know if an Individual is an Employee or Independent Contractor?

Before a company can determine how to treat payments for services, it must determine the business relationship between itself and the individual performing the services. Relevant information in making this determination includes any information that shows the degree of control and independence the individual has when performing services. An individual’s label or position title is not determinative, and instead, it’s necessary to look at the totality of the relationship. There is no magic formula for determining a worker’s employment status, but there are factors that help guide an assessment. There are generally three primary factors considered when determining if an individual is an independent contractor or an employee:

Behavioral Control: Does the company control or have the right to control what the worker does and how the worker does his or her job?
- If a company gives extensive instructions on how work should be done, that indicates the worker is more likely an employee. Instructions may include how, when, and where to complete work; what tools or equipment must be used; what assistants need to be hired to help with any work; and where to purchase supplies and other services.
- If a worker receives extensive training or significant tools, materials, and other equipment from the company, the worker is more likely an employee.
- If a worker has set hours of work, established by the company, the worker is more likely an employee.
- Work performed on the premises of the company for whom the services are performed suggests the worker is an employee.
Financial Control: Are the business aspects of the worker’s job controlled by the company?
- If a worker has a significant investment in his work, he is more likely an independent contractor.
- If the worker is not reimbursed for some or all business expenses, he is more likely an independent contractor.
- If a worker is able to realize a profit or incur a loss, he is more likely an independent contractor.
Relationship of the Parties: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
- If a worker receives benefits, he is more likely an employee.
- If a contract exists, that might be an indication that the worker is more likely an independent contractor.
- If a company has a right to discharge the worker or the worker as the right to quit work at any time without incurring liability, he is likely an employee.

If a company is not able to accurately determine whether a worker is an independent contractor or an employee, a Form SS-8 Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding can be filed with the IRS. The Form SS-8 asks multiple questions about each category (behavioral control, financial control, and relationship type) to get a full picture of the degree of control and independence the worker has. The IRS will make a determination on the worker’s status.

Call General Counsel PC Today

The factors listed above are not all-inclusive. There are other factors to be considered when determining the employment status of an individual. If your business is unsure of the employment status of individuals performing services, attorneys at General Counsel PC can help you make an accurate determination and avoid having to ask the IRS, or worse, facing penalties for misclassifications later. Our attorneys are specialized in labor and employment law and have experience working with business owners across Virginia, specifically in Fairfax County, Arlington, Loudoun County, and Prince William. Call General Counsel PC at 703-556-0411 today to see how we can help you.

Public Policy Exception to At-Will Employment Doctrine in Virginia

In Virginia, employment relationships are presumed to be “at will,” which means that the employment term extends for an indefinite period and may be terminated by either party for any reason, or no reason at all, upon reasonable notice. Virginia courts “have strenuously adhered” to the presumption of at-will employment. See Nguyen v.CNA Corp., 44 F.3d 234, 237-38 (4th Cir. 1995). Virginia courts have relied on an underlying theory that stresses the freedom of contract: “An employee is ordinarily at liberty to leave his employment for any reason or for no reason, upon giving reasonable notice, without incurring liability to his employer.” Miller v. SEVAMP, Inc., 362 S.E.2d 915, 917 (Va. 1987).

Virginia courts have found an exception to the at-will employment relationship if the termination violates a well-defined public policy of the state or violates Virginia statutory authority. Statutes expressing a public policy sufficient to form the basis of a wrongful discharge claim fall into two categories: (1) a statute explicitly stating that it expresses a public policy; and (2) statutes that do not explicitly state a public policy, but rather are “designed to protect property rights, personal freedoms, health, safety or welfare of the people in general.” Lockhart v. Commonwealth Educ. Sys. Corp., 247 Va. 98, 104, 439 S.E.2d 328, 331 (1994).

In Bowman v. State Bank of Keysville, 229 Va. 534, 331 S.E.2d 797 (1985), the Virginia Supreme Court first recognized a narrow public policy exception to the employment at-will doctrine, and held that the plaintiffs’ employer was liable for wrongful discharge after it had terminated plaintiffs in violation of public policy. There, the plaintiffs were stockholders in the bank corporation that employed them and they were terminated for refusing to vote their stock in accordance with the demands of management. The court reasoned that the employees’ termination violated the public policy expressed in Virginia securities law, which allows stockholders the right to vote their shares free from duress and intimidation by corporate management.

Recently, the Supreme Court of Virginia reaffirmed that the public policy exception is a narrow one in Francis v. National Accrediting Commission of Career Arts & Sciences, Inc. 293 Va. 167, 175, 796 S.E.2d 188, 192 (2017). In Francis, the plaintiff was an at-will employee who claimed a co-worker confronted her, yelled obscenities, and threatened bodily harm. The plaintiff filed a petition for and received a preliminary protective order (PPO) against the co-worker. A few days later, the company terminated the plaintiff because she “did not fit the vision of the organization.” The plaintiff filed suit against her employer, claiming wrongful termination under Bowman, arguing that she was discharged in violation of public policy embodied in Virginia’s protective order statutes. The plaintiff argued that her exercise of her statutory rights in obtaining a PPO was a motivating factor in her termination. The court ultimately held that the plaintiff failed to state a claim for wrongful termination under Bowman. The court reiterated that “while virtually every statute expresses a public policy of some sort, we continue … to hold that termination of an employee in violation of the policy underlying any one statute does not automatically give rise to a common law cause of action for wrongful discharge.”

The court explained that the Bowman public policy exception is only recognized in 3 scenarios: (1) when an employer violated a policy enabling the exercise of an employee’s statutorily created right; (2) when the public policy violated by the employer was explicitly expressed in the statute and the employee was clearly a member of that class of persons directly entitled to the protection enunciated by the public policy; and (3) when the discharge was based on the employee’s refusal to engage in a criminal act.

To make a successful claim under the first scenario, the court must first determine “what right was conferred on an employee by statute, and then whether the employer’s termination of employment violated the public policy underlying that right.” In order for the Francis plaintiff to be successful under this theory, she would have to argue that her termination violated the public policy underlying the rights conferred to her in the protected order statutes. However, the public policy of the protective order statutes is to protect the health and safety of the petitioner and his family. For the public policy exception to apply, the plaintiff must show that her termination violated that stated public policy of protection of health and safety, which she did not. Rather, the plaintiff argued that she was terminated because of her exercise of her statutory rights in obtaining a PPO, but the protective order statute does not include a public policy of protecting the exercise of the right to seek a protective order. Since the public policy exception does not recognize “a generalized cause of action for the tort of retaliatory discharge,” the plaintiff did not make a successful claim under Bowman.

The court’s decision in Francis showed an unwillingness to expand the scope of the public policy exception to Virginia’s at will-employment rule. This is likely encouraging for Virginia employers. However, wrongful discharge matters can still be complicated, and employers should continue to be mindful of applicable public policies when making termination decisions for at-will employees.

Call General Counsel PC Today

Whether you are an employer or employee involved in a potential wrongful discharge matter, attorneys at General Counsel PC can provide you with the knowledge and assistance necessary protect your rights. Our attorneys are specialized in labor and employment law and have experience working with employees and employers across Virginia, specifically in Fairfax County, Arlington, Loudoun County, and Prince William. Call General Counsel PC at 703-556-0411 today to see how we can help you.

Unlawful Retaliation: How to reduce our exposure and protect our employees?

It is imperative for employers to be aware of the law on unlawful retaliation and its implications on their business practices and workplace. Title VII of the Civil Rights Act of 1964 declares it unlawful for an employer to discriminate against an employee because he/she opposed any unlawful employment practice or made any charge, testified or participated in an investigation of an unlawful practice. Moreover, such unlawful conduct need not require evidence of wrongdoing. An employer can be responsible for retaliation and accused of wrongdoing even if there was no discrimination, sexual harassment or other unlawful conduct. It is important that employers understand that it is never too late to implement change in their workplace. There is no time like the present to institute new practices or reorganize the way certain things are done.

In the past few years, employees have been protected under this unlawful retaliation law and it has been applied to the following situations:

Where an employee has complained about their employer’s treatment towards another individual under a different federal statute (Cracker Barrel case)
In an employer’s internal investigation, where an employee raised an issue when being asked questions by the investigator (Crawford case)

The types of claims that are brought under this law vary significantly. Therefore, it is vital that employers familiarize themselves with the suggested practices to be put in place at their workplace and the potential consequences of their failure to do so. Further, these practices are there to encourage employers to exercise heightened vigilance and promote a healthier and more productive work environment. The reality is that many employers are not mindful of the consequences that such a failure can have. It is helpful to understand what the most common mistakes are so that you, as an employer, can be aware and implement practices to avoid them.

Overall, employers should be documenting performance issues at the time that they arise. This facilitates a more efficient and prompt process for addressing the issue with the employee who raised it. This can be done in the form of reviews or other mechanisms that the employer feels are best to address a specific concern. Often times, employers are not aware of the resources that are available to them which include the Equal Employment Opportunity Commission. Such resources should be consulted if employers are uncertain about the protocol for a specific situation or even just to ensure that they are in compliance with employment laws.

At the bare minimum, employers must make sure that they have a policy implemented that prohibits unlawful retaliation (a non-retaliation policy). They should also consider engaging in and providing training on what that policy means and how it should apply in their workplace. “Claim-specific training and counseling” is a great way to do just that. Ironically, to reduce exposure, employers really just need to exercise common sense. For example, employers must never forget that “relying on instinct is not a good method for ensuring compliance” or that “ignorance of the law is no defense, it compounds liability”. Do not ignore or isolate complaints. Do not rule out some restructuring and reorganization that may be required. Pay close attention to subsequent employment actions. Think before you act and make sure a given action that you wish to take is not related to any complaint filed.

Even though this is all extremely simple and easy to employ in your workplace employers consistently make mistakes. Some of the most common mistakes that may expose the employer to liability or having a grievance filed against them include:

Failure to train managers on compliance with the basic requirements of employment laws
Failure to file a timely first party report of injury or illness of an employee
Basic documentation disasters (ex. no documentation showing the basis for an employee’s termination, padded performance reviews, mean-spirited memos, sloppy documentation that is imprecise, etc.)
Failure to follow your companies policies without good reason
Failure to investigate and conclusively confirm the factual basis for a termination

So what does this mean moving forward? Employers really need to ensure that the practices they implement in their workplace comply with the law and that they represent the positive values and moral integrity of the employer. Yes, it is that simple. Be careful and ensure that you develop your workplace based on the principles compassion and calmness and the desire to foster the commitment to the company’s core philosophy and values.

Personal Liability for Corporate Obligations – How to Avoid Piercing the Corporate Veil

When individuals form business entities, generally they choose entities that allow them to limit their personal liability, leaving only the entities’ assets vulnerable to lawsuits. For corporations and Limited Liability Companies (LLC), the business entities are separate from the corporate officers and shareholders (or LLC members), and these individuals are typically not liable for the entities’ debts. However, there are instances where individuals may be liable for corporate debts, even if the corporation, and not the individual, is the target of a lawsuit.

The recently decided case, Virginia Electric & Power Co. v. Peters, highlights the importance of taking steps to avoid the possibility of piercing the corporate veil and the resulting personal liability. In Virginia Electric & Power, Dominion Virginia Power (“Dominion”) sued Bransen Energy Inc. (“Bransen”) and obtained a $24.5 million judgment against Bransen. However, Dominion wasn’t able to collect on the judgment and brought another action to pierce Bransen’s corporate veil and impose liability on Michael Peters (“Peters”), Bransen’s owner and sole shareholder.

Peters was Bransen’s president, owner, and sole shareholder and used more than $2.66 million of Bransen’s funds for his personal benefit. Additionally, after Peters knew Bransen had breached its contract with Dominion, he and his family “used Bransen as a personal checking account,” writing checks from the account without any business connection to the company. Peters also created new companies and funded them with Bransen’s funds, even though the new companies had no connection to Bransen. The court found that Peters “used the corporate structure to avoid liability to Dominion by making corporate decisions that benefits him and not his corporation” and that Peters may be personally liable for Bransen’s debt to Dominion.

When trying to pierce the corporate veil, courts have personal jurisdiction over individuals if the individual is the “alter ego” of the corporation. When deciding whether an individual is an “alter ego” of the corporation, the court must determine whether the individual exercised “undue dominion and control over the corporation,” such that “the corporation was a device or sham used to disguise wrongs, obscure fraud, or conceal crime.” Perpetual Real Estate Servs., Inc. v. Michaelson Properties, Inc., 974 F.2d 545, 548 (4th Cir. 1992). When determining whether this undue dominion and control existed, the court may consider whether the individual observed corporate formalities, kept corporate records, paid dividends and whether there were officers and directors. Essentially, the court must determine whether the individual misused the corporate identity to disguise assets.

Once the corporate veil is pierced, a business owner may be personally liable for debts of the corporation. The possibility of piercing the corporate veil is a particular concern for closely held businesses. Business owners should understand the concept of piercing the corporate veil to minimize their own risk by structuring and operating their business entities in an appropriate manner. Below are a few practical tips for business owners to utilize to create the best possibility of avoiding personal liability:

Observe Corporate Formalities – If your business has a board of directors (or managers) hold regular meetings and document and keep the minutes of those meetings. Additionally, business owners should have governing documents for their entities, such as operating agreements and bylaws.
Keep Separate Records and Bank Accounts – It is important that business owners treat the entities as truly separate, especially when it comes to the entities’ assets. Don’t commingle funds or borrow from the company to pay personal expenses. Contribute all business profits into and pay all business expenses from the entity’s bank account and keep business financial records separate from personal financial records.
Operate at Arms-Length – When engaging in transactions that may appear inappropriate to unrelated parties, take care to follow proper protocol. For example, if you plan to contribute personal assets to the entity as a capital contribution, document the transfer. If you own multiple entities that provide services to the other, have contracts in place governing those relationships. When in doubt about whether a transaction is appropriate, err on the side of caution.

A court’s decision to pierce the corporate veil is decided on a case-by-case basis and generally results from a combination of factors with an added element of injustice. Unfortunately, there is no guarantee that a business owner will avoid personal liability for business debts, but there are ways to conduct your business now to put yourself in the best position later, in the event a legal situation arises. The most important thing to remember when conducting a business is to maintain and document the level of separation between entity and owner and always treat the entity as distinct.

Call General Counsel PC Today

Attorneys at General Counsel PC are specialized in business law and have experience working with business owners across Virginia, specifically in Fairfax County, Arlington, Loudoun County, and Prince William. If you’re currently facing a legal issue that’s putting your business at risk or you’re looking for legal advice on the strength of your business protections, General Counsel PC has the expertise you need. For more information about how you can ensure your business is protected, call General Counsel PC at 703-556-0411 today.

Minority Shareholder Rights in Virginia

In Virginia, a court may order that a corporation be dissolved by its shareholders if the directors or those in control of the corporation have acted, are acting, or will act in a manner that is illegal, oppressive, or fraudulent. While Virginia law does not specify what conduct by majority shareholders constitutes oppression, courts have begun taking a much more expansive view as to what such conduct entails and are showing increasing support for minority shareholders.

Generally speaking, Virginia courts have defined oppression as “conduct that departs from the standards of fair dealing and violates the principles of fair play on which persons who entrust their funds to a corporation are entitled to rely.”[1] Many recent court opinions have highlighted that a finding of oppression does not require “imminent” disaster or a finding of fraudulent conduct; however, it does “contemplate a continuous course of conduct and includes a lack of probity in corporate affairs to the prejudice of some of its shareholders.”[2] In the past, courts have been hesitant to find in favor of the minority shareholder by ordering a drastic measure like dissolution of the corporate entity. Now, minority shareholders are increasingly advocating for their rights by bringing suit against majority shareholders in closely held corporations.

In a recent landmark opinion, Colgate et al v. The Disthene Group, Inc., an action was brought by minority shareholders (owning 42 percent of a closely held corporation), alleging that the majority shareholders engaged in a pattern of oppressive and fraudulent conduct that was designed to disadvantage them and waste corporate assets.[3] In their request for relief they demanded that the corporation be dissolved. The majority shareholders relied on the “business judgment rule” to justify their actions. The business judgment rule essentially shields directors from actions taken or not taken, by protecting good-faith business judgments from being second-guessed in court. However, this rule doesn’t apply when the director fails to engage in informed decision-making or makes a decision in the best interests of the director, as an individual, rather than of the corporation.

Not only did the judge in Colgate rule in favor of the minority shareholders, but the judge also specifically noted that non-voting shareholders have the right to be treated fairly by the corporate officers and directors. The judge explained that courts are becoming increasingly intolerant of shareholder oppression and discussed facts indicating that the officers and directors had breached their duties. The judge found that officers and directors breached their duties by: reducing dividends in retaliation for minority shareholders filing a lawsuit; misrepresenting the value of stock when negotiating with minority shareholders who were selling shares back to the company; increasing compensation for majority shareholders; misusing and wasting corporate assets; favoring interests of family members at the expense of minority shareholders; and refusing to allow inspection of corporate books and records. The judge ultimately ordered the dissolution of the closely held corporation because of this oppression of minority shareholders and waste of corporate assets.

As evidenced by Colgate, the consequences of oppressing minority shareholders can be disastrous (and in the aforementioned case, 77 million dollars disastrous!). The type of conduct discussed above can support claims of breach of fiduciary duty, conversion, conspiracy to breach fiduciary duties, and conspiracy to convert – which, if ruled against the majority, can be fatal (literally) for the corporation. While dissolution is generally considered an extreme result, the risk is now even more real for business owners. This case sheds light on the duties of controlling shareholders and the fact that minority shareholders’ rights are being recognized (and protected). Before Colgate, majority shareholders at many companies in Virginia got away with putting their interests ahead of minority shareholders. This case is a critical turning point for business litigation by making the bold statement that controlling shareholders cannot disguise their actions under the business judgment rule and that they can, and will, be held accountable for their actions.

The facts of every case are unique and the oppressive practices cited here are not the only ways majority shareholders may oppress minority shareholders. Additionally, dissolution is not the only remedy available to oppressed shareholders. Attorneys at General Counsel PC have represented businesses of all sizes for over 10 years. Our attorneys have years of experience providing legal counsel and education to business owners across Virginia to help ensure that business owners are aware of the possible risks and can implement practices to mitigate their exposure to liability. For more information about how you can ensure your business is protected, call General Counsel PC at 703-556-0411 today.

[1] Giannotti v. Hamway, 387 S.E.2d 725, 730 (Va. 1990)

[2] Id.

[3] Colgate et al v. The Disthene Group, Inc., 85 Va. Cir. 286 (2012)