CAPA

TCO Calculations —

Operating Costs

S

Unit Unit cost

Personnel Lit Support Director FTE $258,000
Lit Support Manager
Training and Project Manager FTE $163,000
certifications Analyst
DBA/SQL coder FTE $163,000
Office space Admin training
Processing training FTE $114,100
Infrastructure training
Admin Certification FTE $138,550
Infrastructure Certification
Directors/Managers req courses Free
Employees
Total operating costs req courses N/A

req courses N/A

test fee N/A

test fee N/A

$/150 sqft/FTE/mth $50/sqft/mth

$/120 sqft/FTE/mth $50/sqft/mth

AmLaw 200

SaaS Solution Installed ediscovery Solution
Amt Recapture
1 Year Unit cost Amt Recapture 1 Year
1 0%
0 0% $258,000 $258,000 1 0% $258,000
3 70%
0 70% $- $163,000 2 0% $326,000
0 0%
N/A 0% $146,700 $163,000 9 70% $440,100
N/A 0%
N/A 0% $- $114,100 2 70% $68,460
N/A 0%
N/A 0% $- $138,550 2 0% $277,100
1 0%
3 0% $- $1,000 13 0% $13,000

$- $500 11 0% $5,500

$- $500 2 0% $1,000

$- $250 12 0% $3,250

$- $250 2 0% $500

$90,000 $50/sqft/mth 3 0% $270,000

$216,000 $50/sqft/mth 13 0% $1,170,000

$710,700 $1,392,410

46

TCO Calculations —

Total EDRM Costs Sa
Total Infrastructure Costs
Total Operating Costs $

Total Cost of Ownership

AmLaw 200

aaS Solution Installed ediscovery Solution
$- $-
$-
$1,038,750
$710,000 $1,392,410

$710,000 $2,431,160

47

Paying for Clo

oud Products

Paying for Cloud Pro

Three basic ways

1. Absorb the cost

■ Least desirable from firm standpoint
■ Sometimes the only choice

2. Agreement between the pa

■ Helps reduce clients’ costs if all partie
■ Agreement inoculates against cost aw

Ltd. Patent Litigation, 661 F.3d 1361, 13

oducts

arties

es share database
wards by courts — see In re Ricoh Co.,
367 (Fed. Cir. 2011)

49

Paying for Cloud Pro

3. Bill to Client — Can you?

■ Classic lawyer answer — “it depends”
■ What has the client expressly agreed

agreement/engagement letter first
■ MR 1.5(a) recognizes three types of ch

● Legal fees
● Disbursement for services provid
● Cost or expense of services perfo

telephone

oducts

”
to? ABA Model Rule 1.5(a) — look to fee
harges that may be billed to the client:
ded by third-parties
ormed in-house, such as copying or

50

Paying for Cloud Pro

3. Bill to Client — Can you? (co

■ MR 1.5 is construed to mean that the l
“unreasonable amount of expenses” o
(rent, phones, furniture, secretarial ov

■ ABA Formal Opinion 93-379 — for dis
services, the amount charged to clien
● Must be directly related to repres
● Must reflect the actual cost for se
passed on to client (for disbursem
● May include a reasonable allocat
associated with provision of the s

oducts

ont.)

lawyer should not charge an
or charge for general office overhead
verhead, etc.)
sbursements and in-house provision of
nt:
sentation of client
ervices rendered, and any discounts
ments to third-parties)
tion of overhead expenses directly
services (for in-house services)

51

Paying for Cloud Pro

■ There is authority to support a surcharge on disb
(finding that the lawyer may add a surcharge to t

■ Is SaaS a Disbursement or In-house provision of

■ Clearly there is a component paid to a vendor tha
● SaaS providers may charge for various line
— Processing and Analytics, OCR, De-
— Hosting
— Productions
— Support

■ Less clear is whether there is a chargeable compo
● Someone at the firm must manage the Saa
● It is not like secretarial overhead or rent –
● Management of the SaaS might be
— A paralegal/case manager
— Litigation support or IT staff
— Billed at hourly rate
— Only to cover overhead expenses d

oducts

bursements — see ABA Formal Opinion 00-420
the amount paid if the total amount is reasonable)
services?

at most would recognize as a disbursement
e items such as:
-nist, etc.

onent for in-house services
aS at even a minimal level
it is directly related to the matter for which the SaaS is used

directly associated with managing the SaaS platform 52

Paying for Cloud Pro

■ A fourth way…?

■ Cost recovery through the court.
● Majority of courts find that e-
and review is not recoverabl
● Not considered “fees for exe
● State law may be more favor

oducts

-discovery costs associated with hosting
le under 28 U.S.C. § 1920
emplification” or “making copies”
rable

53

How Good Is
Demons

It . . . Really?
stration

Quest

tions?

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Lori Ann Fox, Esq.Corporate Law:

Alternative Entities
Speaker: Lori Ann Fox, Esq. (CT Corp)

ALTERNATIVE ENTITIES: Become acquainted
with new entity types that are gaining in populari-
ty. Ascertain the key considerations when research-
ing which type is best for your organization or cli-
ent. Learn about what new entities are available
and how they are different from and similar to tra-
ditional entities such as the corporation or LLC. Dis-
cover where they can be formed, and how they are
maintained and terminated. Entities discussed in-
clude: Series LLC , Benefit Corporations, Low-Profit
LLC, Unincorporated nonprofit associations Limited
cooperative associations Master Limited Partnership

Lori Ann Fox has been with CT Corporation for over ten years as a government
liaison and legal expert. In her role she focuses primarily on the legal and regulatory
issues facing CT’s customers in formation, compliance, and M&A. She sits on drafting
committees and works closely with state bar associations, government offices and
legislatures to implement changes in business entity and related laws.

Additionally, she regularly lectures across the U.S. on topics related to business
entity operations and filings, including: Delaware Entity Laws, Mergers, Business Enti-
ty Formation and Maintenance, Compliance and Governance, Limited Liability Com-
panies, Specialty/Alternative Entity Types, Ethical Considerations Surrounding Enti-
ty and Compliance Issues.

Prior to joining CT, Ms. Fox maintained a private practice focusing on corporate
law, which was preceded by her serving as General Counsel for an insurance compa-
ny. Ms. Fox received her law degree from Emory University School of Law, and is a
member of the State Bars of Texas, Oklahoma, and Georgia.

Wolters Kluwer CT Corporation

Alternative Overview
Entities
• History of Entity Evolution
PRESENTED BY: • Social Enterprise Entities
• Series LLC
Lori Ann Fox, Esq. • MLP

Government Relations & Regional Attorney CT Corporation Wolters Kluwer CT Corporation 1

Wolters Kluwer

Importance of Alternative Entities Purpose of Business Entities Types

Factors for entity choice • New businesses opportunities
– Type of business • Encourage investments
– Business purpose • Create jobs
– Taxation • Create revenue
– Who are the owners
– Who will manage CT Corporation 2 Wolters Kluwer CT Corporation 3
– Length of venture

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History of Entity Evolution History of Entity Evolution

Challenges for sole proprietorships and general partnerships Solutions to Sole Proprietorships and General Partnerships
– Unlimited liability for the business’ debts
– Only the rich (or those who didn’t mind losing what they owned) could start Corporation Limited Statutory Professional S LLC LLP
businesses Partnership Close Corporation Corporation
– Hard to find investors to help expand
– Not too many risky ventures Corporation

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Some “New” Entity Options Social Enterprise Entities

• Social Enterprise Entities CT Corporation 6 Wolters Kluwer CT Corporation
– Benefit Corporations
– Social Purpose Corporations
– Flexible Purpose Corporations
– L3C
– Benefit LLC

• Series LLCs
• Unincorporated nonprofit associations
• Limited cooperative associations
• Civil foundations
• And some not so new – MLP, REIT

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Social Enterprise Entities What is a Benefit Corporation?

• Blended mission – earn profits for owners; promote social good • An incorporated entity that can earn and distribute profits like a for profit
• Incorporated social enterprise entities corporation and have a charitable or socially beneficial purpose like a nonprofit
corporation
– Benefit corporations
 Model Benefit Corporation Act • Differs from conventional corporation is 3 main ways
 Delaware Public Benefit Corporation – Must provide a general and/or specific public benefit
– Directors must consider interests of non-shareholder impacted by corporate action
– Social purpose corporations – Must report to shareholders on whether it is providing public benefit
• Unincorporated social enterprise entities
• Should not be confused with “Certified B Corporation”
– Low profit limited liability company – Any entity type may apply for certification

– Benefit LLC  B Lab – nonprofit that provides third party certification; most commonly used
• More than half the states have enacted laws authorizing one or more – Entity completes assessment survey, answering between 150 to 200 questions

social enterprise entities measuring its social and environmental impact
• Some states authorize more than 1 social enterprise entity – If it scores high enough it can receive certification that it meets the standard of

social and environmental performance and advertise that fact

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The Benefit Corporation Statutes Forming a New Benefit Corporation (Model Act)

• Maryland was first state to enact Benefit Corporation law (2010) • Benefit corporation is incorporated in same manner as a traditional for
• Over 30 states have done so since then profit corporation
• Most statutes are based on a Model Benefit Corporation Act
• Subject to compliance requirements of general corporation law except
– Drafted by B Lab where statute expressly provides otherwise
• Delaware enacted Public Benefit Corporation Law that differs in several – Registered agent and office
– Name standards
ways from Model Act in 2013 – Transactional filings

• Articles of incorporation must state that it is a benefit corporation

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Becoming a Benefit Corporation (Model Act) Third Party Standard (Model Act)

• Amending articles of incorporation • Standard for defining, reporting and assessing a benefit corporation’s social
• Merger into a benefit corporation and environmental performance
• Approval required by two-third of shareholders
• Factors:
– Comprehensive
– Independent
– Credible
– Transparent

• Must be developed by independent entities
• Factors must be available to the public

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Benefit Corporation vs. Traditional For Profit Corporation Corporate Purposes (Model Act)

Benefit corporation differs from a traditional for profit in three main areas • Mandatory general public benefit purpose
– Corporate purposes
– Director duties • General public benefit is defined by Model Act as a “material positive
– Annual reporting impact on society and the environment, taken as a whole, assessed against
a third party standard, from the business and operations of the benefit
corporation”

• May also have one or more specific public benefits
– Must be set forth in articles of incorporation

 Providing beneficial products or services to low-income or underserved individuals
or communities

 Improving human health
 Promoting the arts, sciences or advancement of knowledge

• May have any other lawful purpose a traditional corporation can have

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Directors’ Duties (Model Act) Benefit Director (Model Act)

• Director required considerations • Publicly traded benefit corporation requires benefit director
• Private benefit corporation permits benefit director
– Shareholders • Some states require all benefit corporations to designate benefit director
– Employees • Benefit director statement included in annual report to shareholders

– Customers – Gives director’s opinion as to whether corporation has acted in accordance
– Community and societal factors with its public benefit purposes
– Local and global environmental interests
– Gives director’s opinion as to whether directors and officers have complied
– Corporation’s short and long term interests with their duties
– Corporation’s ability to accomplish its general and specific benefits
• Director optional considerations
• No priority unless articles of incorporation provide otherwise
• Not personally liable for money damages for a failure by benefit corporation
to pursue or create general or specific public benefit unless articles of
incorporation provide otherwise

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Benefit Enforcement Proceeding (Model Act) Annual Benefit Report (Model Act)

• Benefit enforcement proceeding may be brought by • Purpose
– The corporation directly
– Derivatively by a shareholder holding a certain percentage of shares – Provide shareholders with information to evaluate benefit corporation’s
– A director performance in creating a public benefit and judge whether directors have
– Other persons specified in articles of incorporation or bylaws discharged their responsibilities

• May not be brought against the benefit corporation or its directors and – Reduce “green washing” – phenomenon where company falsely claims to be
officers except in a benefit enforcement proceeding for environmentally and socially responsible

– failure to pursue or create a public benefit • Must be sent to each shareholder within 120 days after end of fiscal year
– violation of a duty, obligation or standard of conduct or at time benefit corporation delivers any other annual reports to
shareholders

• Must post report on public portion of website
• Some states also require delivery to SOS

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Annual Benefit Report (Model Act) Delaware’s Public Benefit Corporation Law

Annual benefit report must include: • Effective August 1, 2013
• Sec. 361 et seq of GCL
– Public benefit information • Differs from Model Act’s benefit corporation in several respects
 Description of ways corporation pursued a general public benefit and any specific public
benefit – Required to identify specific public benefit in certificate of incorporation
 Extent to which benefits were created – Directors required to balance certain interests
 Circumstances hindering creation – Benefit report

– Third Party Standard  Only required every other year
 Statement of any connection between organization that established third party standard  Does not have to be made public
and the benefit corporation  Third party standard for measuring performance not required
 Process and rationale for selecting third party standard
 Assessment of its overall social and environmental performance measured against a • 158 formed in first year
third party standard

– Director information
 If there is a benefit director, his or her name and contact information and a compliance
statement
 Compensation paid to each director

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Delaware Public Benefit Corporation Delaware Public Benefit Corporation

• Definition of PBC • Subject to GCL except to extent PBC subchapter imposes different or
– A for-profit corporation additional requirements
– Intended to produce a public benefit
– And operate in a responsible and sustainable manner • Formation

• Definition of public benefit – File certificate of incorporation with SOS
– Positive effect or reduction of negative effect on 1 or more categories of
persons, entities, communities or interests – Purpose identifies one or more specific public benefits to be promoted
– Includes effects of an artistic, charitable, cultural, economic, educational,
environmental, literary, medical, religious, scientific or technological nature – Must state within its heading that it is a PBC

• Corporation that is not a PBC may become PBC if
– 2/3 of outstanding shares of each class vote to amend the certificate of
incorporation to include provisions required of PBC
– 2/3 of outstanding shares vote to merge or consolidate with survivor being a PBC
– Stockholder not voting for amendment, merger or consolidation is entitled to
appraisal rights

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Certificate of Incorporation of DE PBC Delaware PBC Requirements

• Minimum contents • Stock certificates and notices of meetings must state that corporation is a
– Corporation’s name PBC
– Registered office & agent
– Purposes • PBC may become traditional for-profit corporation upon amendment or
– Capital merger or consolidation with approval of 2/3 of outstanding shares
– Incorporators
• Board of directors shall manage PBC in a manner that balances
• Incorporation fees
– Filing fee - based on authorized shares (minimum - $15, no maximum limit) – Stockholders’ pecuniary interests
– $25 receiving & indexing fee
– $5 fee for entering into database – Best interests of those materially affected by PBC’s conduct
– $20 municipality fee
– County assessment - $24 plus $9 per page – The public benefit identified in its certificate of incorporation
• Derivative Suit

– By stockholders to enforce directors’ duty to balance interests

– Must own at least 2% of outstanding shares or if publicly traded, at least 2% or

own shares with market value of at least $ 2 million

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Delaware PBC – Reporting Obligation Minnesota Public Benefit Corporation

• Statutory report requirements Minnesota Public Benefit Corporation Act (eff. 1/1/15)
– Must provide stockholders with a statement as to its promotion of the public
interests identified in certificate of incorporation and of the best interests of – “General Benefit Corporation”
those materially affected by its conduct  purpose is to pursue general benefit, which is a positive impact on society, the
– Must be provided no less than biennially environment and the well-being of present and future generations; may state specific
public benefit purposes in articles
• Optional report requirements in certificate of incorporation or bylaws
– May require statement provided more frequently – “Specific Benefit Corporation”
– May require that statement be made available to public  purpose is to pursue positive impact or reduction of negative impact on specified
– May require use of third party standard categories of natural persons, entities, communities or interests, other than shareholders;
required to set forth specific public benefit purposes in articles

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Minnesota Public benefit corporation Other Social Enterprise Corporate Entities

Minnesota Public Benefit Corporation Act (eff. 1/1/15) • CA Flexible Purpose Corporation
– Formation – California Corporate Flexibility Act (2012)
– FPC formed under CA corporations code
 Name must contain words “General Benefit Corporation” or “Specific Benefit – Social Purpose Corporation Act (effective 1/1/15)
Corporation” or abbreviation “GBC” or “SBC”
• Social Purpose Corporation
 Articles must state that it is either a GBC or SBC – Washington Business Corporation Act (2012)
– Annual benefit report is filed with SOS – Texas Business Corporation Act (2013)

 GBC required to use third party standard to describe how corporation has pursued
general public benefit

– Directors required to consider effects of conduct on ability to pursue general and or
specific public benefit purposes

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California Flexible Purpose Corporation California Social Purpose Corporation

Differs from Benefit Corporation Senate Bill 1301, effective 1/1/2015
– Renames Corporate Flexibility Act as the Social Purpose Corporations Act
– Must have “Flexible Purpose Corporation” or abbreviation in name – Renames FPC as social purpose corporations (SPCs)
– Authorizes FPC to convert to SPC
– Must identify particular special purpose in articles of incorporation – Requires directors to consider factors deemed relevant

– Directors permitted to consider and weigh factors other than maximizing
shareholder value

– Non-shareholder factors limited to those related to special purpose

– Annual report to shareholders must include management discussion and
analysis concerning special purposes

– In addition to annual benefit report, “special purpose current reports” must be
prepared after certain events (such as expenditures made having adverse
impact, special purpose being satisfied or abandoned)

– Third party standard not required

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Washington Social Purpose Corporation Other Social Enterprise Corporate Entities

Washington Business Corporation Act (2012) Social Purpose Corporation

– Organized to carry out its business purposes in a manner intended to promote – Texas Business Organization Code
positive short or long term effects of or minimize adverse effects of its activities on  Definition: "Social purposes" means one or more purposes of a for-profit corporation that are
any or all of its employees, suppliers or customers; local, state or world specified in the corporation's certificate of formation and consist of promoting one or more
communities; or environment positive impacts on society or the environment or of minimizing one or more adverse impacts of
the corporation's activities on society or the environment. Those impacts may include:
– Optional: specific purposes
- (A) providing low-income or underserved individuals or communities with beneficial
– Formation products or services;

 Articles of incorporation must include provision stating that its mission may not be - (B) promoting economic opportunity for individuals or communities beyond the creation of
compatible with or may be contrary to maximizing shareholder profit jobs in the normal course of business;

 Articles of incorporation may require directors to consider and weigh social purposes - (C) preserving the environment;

– Directors may consider and weigh social purposes in discharging duties - (D) improving human health;

– Annual social purpose report must be made available on website - (E) promoting the arts, sciences, or advancement of knowledge;

- (F) increasing the flow of capital to entities with a social purpose; and

- (G) conferring any particular benefit on society or the environment.

– Articles may include social purpose(s) and may direct D&O to consider social purpose(s)

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Low Profit Limited Liability Company (L3C) L3C – What Problem Does it Address?

• Hybrid of non profit organization and for profit organization • PRI – one way foundation may meet IRS requirement to pay out at least 5%
• Can earn modest profits but earning profits not main goal of its funds towards its mission
• Main goal is to achieve a charitable or socially beneficial mission
• Few foundations make PRIs

– Generally requires a Private Letter Ruling from IRS to determine whether
investment qualifies

– Difficult to locate entities involved in qualifying projects

• Created to encourage charitable foundations to make more Program Related
Investments (PRI)

– L3C intended to eliminate need for PLR by making statutory requirement for
being an L3C match IRS requirements

– Requirements that L3C status be set forth in articles of organization and name
intended to make it easier to find companies involved in qualifying projects

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L3C Requirements L3C formation

• Purpose is to significantly further the accomplishment of one or more • Formation - under LLC act
charitable or educational purposes within the meaning of Sec. 170(c)(2)(b) – File articles of organization with SOS
of IRC and it would not have been formed but for the LLC’s relationship to – Members enter into operating agreement
the accomplishment of those purposes – L3C designation must be indicated on articles of organization
– Name must include “Low Profit Limited Liability Company” or abbreviation
• Does not have as a significant purpose the production of income or the
appreciation of property • Where authorized
– Vermont first state to authorize L3C (in 2008)
• Does not have as a purpose the accomplishment of one or more political – Other states are IL, LA, MI, ME, RI, UT, WY
or legislative purposes – Note: NC enacted and later repealed

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L3C vs. Benefit Corporation - Differences L3C – Is it the Next Big Thing?

• Same basic differences between corporation and LLC • Commentators believe LLC is flexible enough entity that regular LLC can
– Management by board of directors vs. member/manager accomplish same goals as L3C
– LLC’s financial flexibility re profits, losses, distributions
• Critics question whether IRS will approve PRIs in L3C
• L3C statutes do not impose disclosure obligations • Critics believe foundations will still want legal opinion and IRS PLR before
• L3C statutes do not modify fiduciary duty standards
• L3C statutes do not rely upon third party standard to evaluate making PRI in L3C

achievements

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Benefit LLC Series Limited Liability Company

• States enacting include Maryland, Oregon, Pennsylvania, Utah
• LLC may be formed as or elect to be a Benefit LLC
• Articles of organization must identify it as such

• Has purpose of creating a general public benefit
• Articles of organization or operating agreement may identify specific public

benefit
• Persons managing must consider impact of decisions on members,

employees, customers, community, society, environment, etc.
• Must deliver annual benefit report to members
• Advantage over regular LLC with social purpose - brands LLC – customers,

workers, investors, etc. know of commitment to being socially responsible;
avoid greenwashing

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Series LLC Series LLC - Diagram

• What is a Series LLC? Series A Series B
– A limited liability company -Hotel- -Land-
– Formed under the laws of a state that authorizes Series LLCs
– Consists of series that function like separate LLCs Series E
-Gas Station-
• Series can have separate
– Assets Series D Series C
– Liabilities -Apts- -Mall-
– Business purpose
– Members
– Managers

Wolters Kluwer CT Corporation 42 Wolters Kluwer CT Corporation

What Problem Does SLLC Solve? Savings on Organizational Costs – An Example

• Most companies have multiple businesses and properties • ABC Oil & Gas LLC – a Texas LLC owns and operates 5 oil fields
– Debts and liabilities associated with any business or property may be satisfied • ABC wants to separate the liabilities of each oil field
out of assets associated with any other business or property • ABC can form 5 separate LLCs with each LLC owning 1 oil field
– Entity may place each business or property in a separate subsidiary to shield
each from liabilities of others – Total org cost = $1,500 ($300 fee for filing certificate of formation)
– Can be very expensive • ABC can form 1 Series LLC, establish 5 series with each series owning an oil

 Formation and other filing fees field
 Annual report and other maintenance fees – Total org cost = $300 fee for filing certificate of formation

• Series LLC laws provide that in a properly formed and maintained Series LLC,
each business or property may be contained in a separate series and each
separate series has its own assets and own liabilities

Wolters Kluwer CT Corporation 44 Wolters Kluwer CT Corporation

Series LLC Terminology Series LLC Terminology

• The Series LLC itself • A separation of assets, liabilities, owners, and managers in a single entity
– Umbrella – Concept sometimes referred to as “segregation”, “partitioning”, or
– Container “compartmentalization”
– Master
– Parent • Be careful of some statutes that use the term “series” in a similar way
“series” is used in corporation statutes
• The Series – Authorizes creation of series of interests within classes which have different
– Cells rights to distributions, voting rights, etc.
– Mini-LLCs – Do not have liability shield like in a SLLC law
– Subsidiaries
– Baskets CT Corporation 46 Wolters Kluwer CT Corporation
– Units

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Possible Uses For a Series LLC What States Authorize Series LLCs?

• Owning real estate • Alabama • Montana
• Ownership of personal property • Delaware • Nevada
• Separating business venture from business assets • District of Columbia • Oklahoma
• Ownership of multiple business ventures • Illinois • Tennessee
• Holding securities • Indiana • Texas
• Iowa • Utah
• Kansas • Wyoming (7/1/18)
• Missouri

Wolters Kluwer CT Corporation 48 Wolters Kluwer CT Corporation

Traps for the Unwary The Delaware Series LLC Law

• Some state LLC laws use the term “series” but do not limit liability of • Important Series LLC jurisdiction
individual series • Many Series LLCs are Delaware Series LLCs
• As of 3-1-16
• MN, ND, and WI
• Define “series” as a category of membership interests within a class of – Approximately 7,300 total Series LLCs

membership interests that have some of the same rights and preferences – 820 formed in 2015
but differ in one or more rights and preferences from another category • Series concept adapted from DE Business Trust Act (now known as DE
• Similar to types of interest in corporate shares
Statutory Trust Act)

– Used in transactions involving mutual funds and highly financed asset
securitizations
 $ Savings for mutual fund – only Master trust has to file SEC registration rather than
each fund

Wolters Kluwer CT Corporation Wolters Kluwer CT Corporation 51

Forming a Delaware Series LLC Forming a Delaware Series LLC

• Certificate of Formation • DE SLLC subject to same name, purpose, registered agent, annual franchise
– Name tax provisions as regular DE LLC
– Registered office and registered agent
– Notice of limitations on the liabilities of series • General LLC name requirements
– Optional provisions – Contain “limited liability company”, “L.L.C.”, “LLC”

• Filed certificate of formation is constructive notice of limitation of liability – Distinguishable on records from name of other corporation, partnership, LP, ST,
of series LLC

• Filing fee = $90 • SLLC may be formed to carry on any lawful business, purpose, activity
• One copy delivered to Division of Corporations
• Effective upon filing or delayed effective date up to 180 days – Profit or NP

– Exception: no banking
• Required to file annual franchise report and pay annual fee - $300
• SLLC must appoint and maintain registered agent
• No statutory provisions re name, purpose, registered agent, franchise tax

applicable to each individual series

Wolters Kluwer CT Corporation 52 Wolters Kluwer CT Corporation 53

LLC Agreement Creating a Series in a DE SLLC

• Main governing document of Series LLC • Title 6, Sec. 18-215 Del Code
• Member agreement as to affairs of LLC and conduct of business
• Series – LLC agreement may establish, or provide for establishment of 1 or more series
of members, managers, LLC interests or assets
– Rights of members of series provided for
– Management of series provided for – Having separate rights, powers or duties with respect to specified property or
– Classes or groups established obligations of LLC or profits and losses associated with specified property or
– Termination of series provided for obligations

– May have a separate business purpose

– May have a separate investment objective
• Each series may sue or be sued, contract, hold title to assets, grant liens

and security interests and conduct business in its own name

– Not in original version of 18-215

– Added later to address confusion as to a series’ powers
• Statute does not provide that a series is a separate entity under state law

Wolters Kluwer CT Corporation 54 Wolters Kluwer CT Corporation 55

Limitation of Liability Under DE Law Members of DE Series

• Debts, liabilities, obligations incurred, contracted or existing with respect • Have contractual freedom to decide their financial and management rights
to particular series are enforceable against assets of that series and not and duties
assets of LLC or different series if:
– Notice of limitation of liability is set forth in certificate of formation • May agree to be personally liable for series’ debts
– LLC agreement created one or more series • Classes or groups of members with different rights, powers, duties allowed
– Separate and distinct records are maintained for each series • Voting rights may be on per capita, number, financial interest or any other
– Assets associated with each series are held in distinct and separate records
and accounted for in such records separately from assets of LLC or other series basis or denied

Wolters Kluwer CT Corporation 56 Wolters Kluwer CT Corporation 57

Management of DE Series Termination of DE Series

• Vested in members of series by DE LLC Act • Series may be terminated without causing dissolution of master Series LLC
• Decisions of members owning more than 50% interest control • If master Series LLC is dissolved, each series must be terminated and its
• LLC agreement may provide for managers of series
• Managers are elected, have duties and liabilities as provided in LLC affairs wound up
• Series terminated upon first to occur of
agreement
• Distributions may be made unless they will make series’ liabilities exceed – Time specified in LLC agreement
– Event specified in LLC agreement
fair value of assets – Consent of members owning more than two-thirds of interest in profits (unless
• Event causing member or manager to cease association with one series
otherwise provided)
does not cause dissociation with any other series – Time there are no members (and personal rep of last member does not consent

to continue)

Wolters Kluwer CT Corporation 58 Wolters Kluwer CT Corporation 59

Changing from DE LLC to DE Series LLC The Series LLC Laws of Other States

• Amend certificate of formation to include notification of limitation of • Most SLLC laws based on Delaware law
liability of series • SLLC formed in same manner as regular LLC

• File certificate of amendment – File articles of organization with SOS
• Filing fee - $100 – Financial rights, management provisions, etc. set forth in Op Ag
• Amend LLC agreement to establish series • SLLC subject to same compliance requirements as regular LLC
– Appoint registered agent, file annual report
– Procedure set forth in LLC agreement • Series established in Op Ag
• Series added or dissolved by amending Op Ag

Wolters Kluwer CT Corporation 60 Wolters Kluwer CT Corporation 61

The Series LLC Laws of Other States The Series LLC Laws of Other States
–Some Inconsistencies
• Debts, liabilities, obligations of series are enforceable against assets of that
series if: • A few states provide that a series may be considered a separate entity
– Notice of limitation of liability is set forth in articles of organization – TX- specifically provides that series is not a separate entity
– Operating agreement establishes 1 or more series having separate liabilities
– Separate and distinct records are maintained for each series • Some (not all) states specifically provide that a series may sue and be sued,
– Assets associated with each series are held and accounted for separately from hold assets, enter into contracts in its own name
assets of LLC or other series
• Some require public filing with SOS to establish series
• Some require name of each series to include name of master LLC and be

distinguishable from each other

Wolters Kluwer CT Corporation Wolters Kluwer CT Corporation

Illinois Series LLC Law Illinois Series LLC Law

• Name of series • May be treated as a separate entity to the extent set forth in the articles of
– Must contain entire name of LLC organization
– Must be distinguishable from name of other series
• LLC and any of its series may
• File Certificate of Designation with SOS to form and terminate a series – Consolidate operations as a single taxpayer
– Contains series name – Work cooperatively
– Name of managers – Contract jointly
– Whether member or manager managed – Elect to be treated as a single business in order to qualify in IL or any other
– Filed by LLC or any manager or designee state

Wolters Kluwer CT Corporation 64 Wolters Kluwer CT Corporation

Qualification of Series LLC Taxation of Series LLC
Doing Business in Foreign States
• Federal income taxation
• SLLC laws generally provide that a SLLC formed in another state that is
registering to do business as a foreign LLC must state in its certificate of – Proposed Reg. Sec. 30.7701-1, 75 Fed. Reg. 55,699 (2010)
authority that it is a SLLC
– Treats each series as a separate entity
• Some states require statement that the debts and liabilities of a series may
only be enforced against assets of that series – Each series taxed pursuant to check-the-box rule
 Classified by default as partnership or disregarded entity
• Statutes do not provide whether individual series must (or may) register
• Most LLC laws that do not authorize formation of SLLCs do not have – Although only proposed, regulations are “substantial authority”
• State income taxation
provisions dealing with qualification of foreign SLLC
– Only a few states have issued rulings or guidance
 CA – does not authorize domestic SLLCs but will treat each series of foreign SLLC
registering to do business as a separate LLC, subject to the minimum annual
franchise tax
 TX – will treat all series as a single taxable entity for margin tax purposes
 TN – held that a TN SLLC had to file separate franchise and excise tax returns for
each series

Wolters Kluwer CT Corporation Wolters Kluwer CT Corporation

A Warning to Business Owners & Investors Some of the Unanswered Questions

• Courts have not interpreted Series LLC laws yet • Taxation

• State legislatures still need to clarify or change laws – Federal rules are not final

• Federal and state agencies have not ruled on application of laws to Series – Taxation other than income tax unclear
LLCs
– Proposed regs do not address treatment of series for federal employment taxes
• Due to lack of court, legislative, and administrative guidance, there are
uncertainties involved in doing business as a Series LLC – Proposed regs do not address ability of series to maintain an employee benefit
plan

– State taxation not clear
 Will states follow federal treatment?
 If one series establishes tax nexus will master Series LLC and other series be subject to
tax?

• Does the doctrine of veil piercing apply?

– If so, a creditor of one series might be able to reach the assets of another series

– If it applies, under what circumstances would a court pierce a series’ veil?

Wolters Kluwer CT Corporation 68 Wolters Kluwer CT Corporation 69

Some More Unanswered Questions Series LLCs in the Courts

• Will a state that does not authorize formation of a Series LLC recognize the • Alphonse v. Arch Bay Holdings, LLC, 2013 US App LEXIS 24665
internal liability shield granted by a foreign state’s law? • GxG Management, LLC v. Young Bros. & Co., Inc., 2007 U.D. LEXIS 43462
• Two decisions dealing with the capacity of a series to sue or be sued
• Will determination of whether a Series LLC is doing business in a foreign • Neither court came to a conclusion
state differ from determination of regular LLC? • But good illustrations of some of the issues to be decided

– What if only 1 series of multi-series LLC is doing business in state?

– Will LLC have to register?

– Or will that be just one factor in determining whether LLC as a whole is doing
business?

• May an insolvent series file a bankruptcy petition separate and apart from
the master Series LLC?

– Issue – is a series a “person” under bankruptcy law

– If series can file, only its assets become part of bankruptcy estate
• If a series sells interests to the public is it subject to federal or state

securities laws?
• May a series make a filing under UCC article 9?

Wolters Kluwer CT Corporation 70 Wolters Kluwer CT Corporation

Alphonse v. Arch Bay Holdings, LLC Alphonse v. Arch Bay Holdings, LLC

• Facts: • Court of Appeals reverses

– DE SLLC (Master LLC) assigned a mortgage note to a series – For res judicata to bar claim, court must determine that there is a sufficient
identity of interest between the Master LLC and series
– Default occurs
– This is a fact based determination that should not have been decided on a
– Series files a petition to enforce the mortgage and forecloses on mortgagor’s motion to dismiss
home
– Delaware law did not necessarily govern as it is not clear if the issue of
– Mortgagor files action against Master LLC under unfair debt collection law whether an LLC or a series is liable to third parties is an issue of internal or
• District court dismisses action external affairs

– Held that claim against Master LLC was barred by the res judicata effect of the – Remanded back to district court to determine if DE law governed and if there
series’ foreclosure action was a sufficient identity of interest

– Held that Delaware law governed based on conflicts rule providing that laws of
formation state govern issues involving internal affairs

Wolters Kluwer CT Corporation Wolters Kluwer CT Corporation

GxG Management, LLC v. Young Bros. & Co. Will Series LLC Statutes Catch On?

• Facts: • “The Series LLC illustrates the costs and benefits of new business forms: the
opportunity to experiment along with the risks of uncertainty” (Larry
– DE Series LLC (Master LLC) bought a boat and formed a series to hold title to and Ribstein)
operate the boat
• Jury is still out on whether SLLC is “next big thing”
– Master LLC filed suit alleging poor workmanship and misrepresentation • Could track path of ordinary LLC
– Master LLC moved to amend its complaint to add the series as a plaintiff
• Court: – At first, reluctance to form LLCs because of uncertainties regarding taxation,
liability protection in states without LLC statute, etc.
– District court denied the motion, holding that the Master LLC could maintain the
action even though title was held by the series – Once clarified all states passed LLC laws and today LLC is dominant entity type
– If uncertainties surrounding SLLC are clarified same could happen
– District court later amended its findings of fact and conclusions of law
– Court clarified that it was not holding that the Master LLC could sue on behalf of

the series

– Court clarified that it was not holding that the Master LLC and series were
separate entities

– Court was holding that regardless of those issues the Master LLC had suffered
harm and could sue to recover for that harm

Wolters Kluwer CT Corporation Wolters Kluwer CT Corporation

Will Series LLC Statutes Catch On? NCCUSL Entities

• Some indications it may not catch on Wolters Kluwer
– NJ, CA, FL, MN recently enacted new LLC laws and did not include series LLC
provision

• Some indications it may catch on
– AL recently enacted a new LLC law and did include SLLC
– NCCUSL currently drafting uniform law which authorizes SLLCs

 when drafting RULLCA a few years ago NCCUSL criticized concept
– ABA Revised Prototype LLC Act includes SLLCs (original prototype did not)

• But will it catch on with legal professionals?

Wolters Kluwer CT Corporation CT Corporation

NCCUSL’s Creations Unincorporated Non Profit Association

• What is NCCUSL? • Non profit associations include charitable orgs, religious orgs, political
– National Conference of Commissioners on Uniform State Laws groups, trade ass’ns, social groups
– For information go to http://www.uniformlaws.org/
– “The Uniform Law Commission provides states with non-partisan, well • There are hundreds of thousands of non profit associations
conceived, and well drafted legislation that brings clarity and stability to • Some are corporations or LLCs
critical areas of state statutory law.” (statement on ULC website) • Most are not formed under a state statute and are governed mainly by
– Drafted uniform LLC and LP laws
– Also created new entity types common law
• Under common law association is a collection of its members and not a
• Unincorporated nonprofit association
• Limited cooperative association separate legal entity

– Association cannot own property, sue or be sued, etc.

– Members are liable for association’s debts

– Existence ended upon change in membership

Wolters Kluwer CT Corporation Wolters Kluwer CT Corporation

Unincorporated Non Profit Association UNPA

• NCCUSL drafted Uniform Unincorporated Non Profit Association Act • Revised UUNPA did the following
(UUNPA) in 1992 and Revised UUNPA in 2008 – Provided default rules regarding membership and management
– Dealt with agency issues
• Why? To address problems caused by non profit association’s non-legal – Authorized mergers
entity status under common law – Clarified dissolution procedure

• UNPA is formed under a state statute • UNPA does not have to file a formation document
• UNPA may file statement of authority setting forth who has power to
• Under UUNPA and RUUNPA, UNPA is recognized as a legal entity
transfer property
• UNPA can buy and hold property and sue and be sued in its own name • UNPA may file statement appointing an agent SOP
• UNPA may merge with another UNPA or other entity
• UNPA is responsible for its own debts and liabilities

• UNPA has same powers as an individual to do all things necessary to carry
out its purposes

• UNPA has perpetual duration

Wolters Kluwer CT Corporation Wolters Kluwer CT Corporation

Limited Cooperative Association LCA

• Uniform Limited Cooperative Association Act (2007) • What problem does the LCA address?
– Drafted by NCCUSL • Cooperative statutes do not permit outside investment from persons who
– Created new business entity – the limited cooperative association
would have a vote in governing the coop
• What is a cooperative? • Makes it hard to raise capital
– Statutory organization • LCA can admit outside investors as members with voting rights and the
– Owned by people joining together to
right to participate in gains or losses
 use the organization to provide themselves with goods or services • LCA does not replace existing cooperative statutes; provides an alternative
 Control the organization
 Provide basic equity financing to traditional coop
 Share in the financial benefits in accordance with their respective use of the • LCA statutes have elements of traditional cooperative statutes and LLC

organization (rather than by what they invested) statutes

Wolters Kluwer CT Corporation Wolters Kluwer CT Corporation

LCA Master Limited Partnership

• Formed by filing articles of organization with SOS
• Required to appoint and maintain agent SOP
• Required to file annual report with SOS
• Adopts bylaws setting forth financial and governance provisions
• Managed by board of directors
• Has two types of owners

– Investor member – does not utilize coop’s services
– Patron member – does utilize coop’s services
– Both types of owners have voting rights

Wolters Kluwer CT Corporation Wolters Kluwer CT Corporation

What is the MLP? Master Limited Partnership

• Master Limited Partnership (MLP) • Limited partnership formed under a state LP law
– Not really new but good to know about
– First MLP formed in 1981 (Apache Corp) – Formed by filing certificate of limited partnership
– Early MLPs operated in a variety of industries (hotels, casinos, sports teams,
including the Boston Celtics) – Subject to same compliance requirements as any other LP (filing requirements, registered
– 1987 – tax law changed to restrict use of MLPs to natural resource based agent, foreign qualification, Annual Report etc.)
activities
– Management and financial provisions set forth in LP agreement
• Advantage of MLP – provides tax advantages of a partnership with liquidity
of a publicly traded corporation – Most MLPs are formed under Delaware’s LP law
• Publicly traded
• Listed on a major stock exchange

– About two-thirds trade on NYSE, rest on NASDAQ
• Not subject to corporate taxation
• Engaged in the transportation, storage, processing of minerals and natural

resources
• To qualify as a MLP and not pay corporate income tax, LP must receive at least 90%

of its income from natural resource based activities

Wolters Kluwer CT Corporation Wolters Kluwer CT Corporation

Real Estate Investment Trusts and a little bit more Real Estate Investment Trust (REIT)

• Also not new but good to know about because of importance to economy

• Business entity that owns or finances income producing real property

• Similar to mutual fund except REIT buys real estate related assets instead
of stocks and bonds

• Created by Congress in 1960

• Problem addressed

– Only the very rich could afford to invest in large scale commercial real property

– REIT allows average person to buy into and profit from professionally managed
real estate portfolio

• REIT has tax advantage over non-REIT real property owners

• If REIT distributes all profits to shareholders, REIT does not have to pay
corporate level income tax

Wolters Kluwer CT Corporation Wolters Kluwer CT Corporation 89

REIT REIT

• Despite name, does not have to be trust • To qualify as a REIT company must comply with IRC provisions
• Can be trust, corporation, LLC, LP or any other entity that is taxed as a • Restrictions include (among others)

corporation – Must be taxable as a corporation
• Nearly all REITs are trusts or corporations – Must be managed by a board of directors/trustees
• Most REITs are incorporated under either the Maryland REIT law or – Shares must be fully transferable
– Minimum 100 shareholders
Maryland general corporation law – Thresholds on amount of assets that must be real estate
– 75% of publicly traded REITs are Maryland domestics – Must pay at least 90% of taxable income as dividends
• Others are Delaware Statutory Trusts

Wolters Kluwer CT Corporation 90 Wolters Kluwer CT Corporation 91

“Shareholder Friendly” Corporation Laws North Dakota’s Publicly Traded Corporations Act

• North Dakota’s Publicly Traded Corporation Act (2007) • Shareholder friendly provisions
– Referred to as US’ first “shareholder friendly” corporation act – Requires majority vote to elect directors
– Ch. 10-35 of North Dakota Code – Requires corporation to include in its proxy statement director candidates nominated by
shareholders owning at least 5% of shares
• Problem it addressed: lack of influence shareholders have over corporate – Requires corporation to reimburse shareholder’s proxy solicitation costs
governance – Prohibits supermajority voting or quorum
– Enacted in reaction to governance & financial scandals – Directors’ terms may not be longer than 1 year or staggered
– Intended to allow shareholders to better monitor director performance – 10% shareholder has right to call special meeting
– Carl Icahn was major proponent – Restricts poison pills
– Permits any shareholder to propose the adoption, amendment or repeal of a bylaw
– Prohibits chairperson of board from serving as executive officer

• Proponents hoped publicly traded corporations would reincorporate in ND or DE
would adopt these provisions
– Neither has happened

Wolters Kluwer CT Corporation Wolters Kluwer CT Corporation

New Hampshire Foundation Act Review

• Enacted in 2017 • Why there are so many statutory business entities
• Social Enterprise Entities
• First US state to permit establishment of civil law foundation • Series LLC
• Master LP
• Problem addressed - Intended to enable families from countries where
foundations are preferable to trusts as a wealth management vehicle to
avail themselves of a US entity

• Defined as a legal entity that holds and manages assets for the benefit of
its beneficiaries or in furtherance of its purpose

• Draws on corporation and LLC acts for rules governing formation,
dissolution and foreign qualification

• Draws on trust law for rules governing rights and duties of founders,
beneficiaries, directors

Wolters Kluwer CT Corporation 94 Wolters Kluwer CT Corporation

Summary Wolters Kluwer CT Corporation

• Several new statutory entities have become available in 21st century Thank You for Attending 97
• Intended to solve certain problems identified by their proponents
• Options lawyers may consider when deciding what entity type best fits Alternative Entities CT Corporation

clients’ needs Lori Ann Fox, Esq
• Formed by filing documents with state business entity filing office
• Required to comply with state business entity laws to maintain status Government Relations & Regional Attorney

Wolters Kluwer CT Corporation Wolters Kluwer

Emma Luevano, Esq.Employment/Labor:

New California Wage/Employment Laws
Speaker: Emma Luevano, Esq.

PRESENTATION: The California Legislature passed
several labor and employment bills that Governor Jerry
Brown signed into law in 2017. These laws relate to wage
and hour, leaves of absence, hiring practices, and other
workplace protections. A number of these laws went into
effect on January 1, 2018. Ms. Luevano will discuss these
laws so we can help ensure compliance.

Emma Luevano, Esq. represents management in a variety
of labor and employment matters, including sexual harass-
ment and other forms of employment discrimination, wage and hour, public policy violations, wrongful termi-
nation, and retaliation. Represents employers in state and federal court and before state and federal adminis-
trative agencies (e.g., DOL and California DFEH). Conducts training and provides counselling and advice to em-
ployers regarding compliance with state and federal law, personnel policies and manuals, employment agree-
ments and other personnel decisions.
.

1/11/2018

California Employment Law CALIFORNIA SUPREME COURT
Headlines SIGNIFICANTLY RESTRICTS WHO MAY
BE CLASSIFIED AS AN INDEPENDENT
Emma Luevano, Esq. CONTRACTOR

June 23, 2018 2

1 © MSK 2018

Independent Contractor or Employee? Independent Contractor or Employee?

How a worker is classified has significant • Courts and agencies use various tests for
consequences with respect to: determining IC status under different laws.

• Payment of Wages • Most of these tests are variations of the multi-
• Income and Payroll Taxes factor common law “right of control” test to
• Unemployment Insurance determine who controls the manner and
• Workers’ Compensation means of performing the work.
• Employee Benefits
• Intellectual Property • Under these multi-factor tests, no factor is
controlling.
3
4

Independent Contractor or Employee? Independent Contractor or Employee?

Dynamex v. Superior Court (4/30/18) • “ABC” test requires THREE things
For purposes of the California Wage for worker to be properly
Orders, California Supreme Court adopts classified as an independent
the “ABC” test for determining whether contractor:
delivery drivers were properly classified
as independent contractors. 6

5

1

1/11/2018

Independent Contractor or Employee? Independent Contractor or Employee?

“(A) that the worker is free from the “(B) that the worker performs
control and direction of the hirer in work that is outside the usual
connection with the performance of course of the hiring entity’s
the work, both under the contract business;”
for the performance of such work
and in fact;” 8

7

Independent Contractor or Employee? Independent Contractor or Employee?

“(C) that the worker is customarily • The “ABC” test will make it much
engaged in an independently harder to establish that someone is
established trade, occupation, or an IC for wage and hour purposes.
business of the same nature as the
work performed for the hiring 10
entity.”

9

Independent Contractor or Employee? Independent Contractor or Employee?

• While Dynamex technically only • Court spends considerable time
impacts IC determination under discussing the negative societal
the Wage Orders, as a practical impact of classifying workers as
matter, it will impact classification independent contractors.
for all purposes.
• Will test be adopted for other
11 purposes?

12

2

1/11/2018

Wage and Hour Impact Wage and Hour Consequences

Employees are entitled to: Wage and Hour Laws
• Minimum wages and overtime • Substantial payments of unpaid wages and
• Timely payment of wages
• Meal and rest periods overtime
• Accurate wage statements • Significant penalties for violations of Wage
• Numerous other protections in the Wage
Orders and Labor Code
Orders and Labor Code • Interest and attorneys’ fees

13 14

Tax Impact Tax Consequences

• Employers must withhold and remit federal and state income If an employer misclassifies an employee as an
taxes for employees IC, the employer is liable for both the
employer’s and employee’s taxes!
• Employers must remit employer portions and withhold and
remit employee portions of payroll taxes, e.g., o Unremitted federal and state income taxes
FICA (Employer and employee-paid SS and Medicare) plus interest and penalties
FUTA (Employer-paid federal unemployment) o Unremitted payroll taxes plus interests and
UI (Employer-paid CA unemployment) penalties
SDI (Employee-paid state disability)
16
15

Workers’ Compensation Impact Workers’ Compensation Consequences

• Employers must provide workers’ • If misclassified as an IC, individual would not
compensation coverage for all employees be covered by employer’s workers’
compensation insurance and could sue in tort
• Where coverage has been secured, workers’ for workplace injuries
compensation is the employee’s exclusive
remedy for work-related injuries • Also, there are significant penalties, and even
possible criminal prosecution, if required
17 coverage is not provided

18

3

1/11/2018

Unemployment Consequences Employee Benefit Consequences

Unemployment Claims Employee Benefit Plans
• If misclassified as a contractor, the worker could • ACA requires employees to be covered
• Even if plan excludes “independent
collect UI benefits at the conclusion of
assignment and the employer will be responsible contractors,” if misclassified as such,
for the unpaid payroll taxes, plus penalties and the worker could have claims for
interest benefits under medical, 401(k), pension
• Significantly, in California, UI claims are filed with and other employee benefit plans
the EDD, the same agency that is responsible for
payroll tax collection and audits 20

19

Misclassification Claims CALIFORNIA LAW PROHIBITS
MAKING INQUIRIES ABOUT
• Many of the claims that stem from APPLICANTS’ PRIOR SALARIES
the misclassification of independent
contractors lend themselves to 22
class action treatment!

21

New CA Law: Labor Code Section 432.3 What Is Prohibited?

• Effective January 1, 2018 • Inquiring about a job applicant’s salary history
• Applies to all applicants for jobs in California • Seeking an applicant’s salary history from any
• Although California laws generally do not
source (e.g., former employers, public records)
apply out of state, if a contract is negotiated, • Considering or relying upon applicant’s salary
a job is applied for, or a salary inquiry is
made in California, the law may apply history in determining whether to make an
offer of employment or the financial terms of
23 © MSK 2018 an offer

24 © MSK 2018

4

1/11/2018

Many Open Questions Voluntary Disclosure of
Salary History?
CA Law Does Not Define:
• “Salary or salary history” – probably includes The California law states:
“If an applicant voluntarily and without prompting
all compensation discloses salary history information to a prospective
• “Applicant” – assume applies to anyone employer,” employer may consider and rely upon
voluntarily disclosed information “in determining the
being considered; silent as to whether salary for that applicant”
current employees are “applicants”
Query whether once such information had been disclosed,
25 © MSK 2018 the employer may verify it. The law is silent on this point.

26 © MSK 2018

How May an Employer Use May Employer Make Inquiries
Voluntarily Disclosed Information? about Competing Offers?

• Even if lawfully obtained, salary history MAY • A competing offer arguably is not part of
NOT be used as the sole basis for setting one’s “salary history”
salary. Doing so subjects employer to
unequal pay discrimination claims. • However, California law is silent on this
issue, so employers should tread carefully
• Also, recent federal case held salary history
MAY NOT be used at all for setting salary. 28 © MSK 2018

27 © MSK 2018

Inquiries about Salary Expectations? Employer Must Disclose “Pay Scale”

• Although the California law is silent on this The California law expressly states that “upon
point, it would not appear to preclude an reasonable request,” an employer “shall
employer from asking about the provide the pay scale for a position to an
compensation an applicant is seeking applicant applying for employment”
• Presumably does not impose an affirmative
29 © MSK 2018
duty on the employer to establish a pay
scale where one does not exist

30 © MSK 2018

5

1/11/2018

What Are the Penalties? CALIFORNIA “BANS THE BOX”:
UNLAWFUL TO ASK ABOUT AN
• None specified APPLICANT’S CRIMINAL HISTORY
• However, violations would subject an BEFORE CONDITIONAL OFFER

employer to possible civil claims, including 32
possibly equal pay/discrimination claims

31 © MSK 2018

California “Bans the Box” California “Bans the Box”

• Effective January 1, 2018 • Step 1: If an employer plans to deny the
• California employers with 5 or more employees applicant based in whole or in part on the
conviction history:
are prohibited from:
– Must conduct an individualized assessment
– Including conviction history questions on employment – Analyze whether the criminal history has a
applications; or
direct and adverse relationship with the specific
– Inquiring or considering conviction history information job duties
– Unless a “conditional offer of employment” has been – Notify the applicant in writing

made 34 © MSK 2018

33 © MSK 2018

California “Bans the Box” California “Bans the Box”

• Step 2: Consider any rebuttal information submitted EXCEPTION:
by applicant. Prohibition does not apply with respect to “a
position where an employer or agent thereof is
• Step 3: If an employer makes a final decision to deny required by any state, federal, or local law . . . to
applicant based in whole or in part on the conviction restrict employment based on criminal history.”
history, employer MUST:
• Notify the applicant in writing 36 © MSK 2018
• Include information on right to file a complaint
with the Department of Fair Employment and
Housing

35 © MSK 2018

6

1/11/2018

California “Bans the Box” CALIFORNIA LEGALIZES
RECREATIONAL USE OF MARIJUANA
• Employers also must comply with the:
38
– Fair Credit Reporting Act
– California Investigative Consumer Reporting CALIFORNIA LAWS vs.
FEDERAL IMMIGRATION ENFORCEMENT
Agencies Act
– Any applicable local “Fair Chance” or “Ban the 40

Box” laws

37 © MSK 2018

Proposition 64:
Recreational Marijuana

• Like alcohol, marijuana impairs judgment and
employer has a right to regulate use or being
under influence during working hours

• Under current CA law, employer has no duty to
accommodate even lawful medical marijuana

• Marijuana remains illegal under federal law and
federal AG announced plan to rescind Obama-era
policy of non-enforcing in states where it is lawful

39 © MSK 2018

CA Immigration Worker Protection Act CA Immigration Worker Protection Act

• Effective January 1, 2018 • Employers must balance state law and federal
• Employers Must: laws

– Worksite access: Require judicial warrant before providing • Civil fines – $2,000 to $10,000 per violation
“immigration enforcement agent” access to nonpublic areas
42 © MSK 2018
– Records access: Require subpoena or judicial warrant - or valid
Notice of Inspection (NOI) - before providing access to records

– Notice: Give 72-hour notification to employees and labor union
representatives before I-9 inspections

– Reverification: Prohibit reverifying employment eligibility of
employees at a time or manner not required by federal law

41 © MSK 2018

7

New Law Prohibits Disclosure of 1/11/2018
Immigration Status in Court
#MeToo MOVEMENT LEADS TO
New law (SB 785) signed by Governor on RESTRICTIONS ON CONFIDENTIAL
May 17, 2018 and effective immediately:
Unlawful to disclose a person’s immigration SETTLEMENTS
status in court, unless a judge rules “in camera”
that such evidence should be admitted 44

43 © MSK 2018

Federal Tax Law New York Law

• No tax deduction for settlement payments or • Effective July 2018, NY law will impose restrictions
attorneys’ fees related to “sexual harassment or on including confidentiality provisions relating to
sexual abuse if such settlement or payment is sexual harassment claims in their severance and
subject to a nondisclosure agreement” settlement agreements

• Effective for “amounts paid or incurred after the • Law will require employer to provide employee
date of the enactment of this Act,” regardless of with at least 21 days to consider whether to
when settlement agreement was entered into consent to the confidentiality provision, and 7 days
to revoke their consent
45 © MSK 2018
46 © MSK 2018

Questions?

47 © MSK 2018

8

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